Mortgage from family member

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atDev
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Mortgage from family member

Post by atDev »

Has anyone had any experience with a family mortgage service such as nationalfamilymortgage.com to take a loan from a family member for a mortgage?

I am contemplating working with a family member to give them a higher interest rate than they can get elsewhere on their savings, save on refinance fees myself, but also keep everything legal/clean for tax purposes, etc.
Ben | Young Investor and Learning
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jimb_fromATL
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Re: Mortgage from family member

Post by jimb_fromATL »

atDev wrote:Has anyone had any experience with a family mortgage service such as nationalfamilymortgage.com to take a loan from a family member for a mortgage?

I am contemplating working with a family member to give them a higher interest rate than they can get elsewhere on their savings, save on refinance fees myself, but also keep everything legal/clean for tax purposes, etc.
I'd advise against it. I know several families including some inlaws where some family members carried mortgages for others for the reason you mention. Virtually every one of them ended in a disaster of some sort ... ranging from hard feelings to essentially never speaking to each other again.

The main problem is that if the borrower falls on hard times and can't make the mortgage payments on time all the time, the lender soon loses all of the advantage they might have had from a higher mortgage rate. But because it's family they don't feel right about foreclosing, so they have no income as interest and their principal is gone too. And when the borrower does fall on hard times, or if they want to spend their money on a new car or other non-necessity, they feel that they don't have to pay the mortgage regularly or on time all the time because it's family. it's not going to change it if a third party is collecting the payments.

Another problem If it's parents lending to one of several of their children, but didn't or can't afford to do it for others then the other children tend to feel slighted. And it gets even worse if the parents die and the borrower feels that they don't have to pay it back ... or if the parents left it in their will that the debt was to be forgiven ... which effectively gives a bigger portion of the estate to the sibling who borrowed the money.

jimb
abyan
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Re: Mortgage from family member

Post by abyan »

I lent several thousand to a family member I trusted implicitly. They promised to pay it back in 6 weeks. It's been going on 5 years now. They just got back from a lovely vacation. I'm still waiting for my money.

We're also dealing with mom and dad having done something similar to what you describe in order to bail out my brother's mortgage. He fell on continued tough times, so for seven years he just didn't pay it. They did nothing about it, slipped him spending money, he on the other hand didn't seem to worry about setting up a stricter budget. So $70,000 left their accounts, forever, which is now making the rest of us rather bitter -- it's also complicating lots of other matters, such as the estate, as mentioned above. We're not terribly thrilled about that one either.

I'd advise against lending several thousand dollars to a family member. A mortgage is seriously asking for trouble. I didn't think several K would be a problem, and it's turned into a huge one.

I'm sure the lender doesn't think this would happen to them. Neither did I :)
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LadyGeek
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Re: Mortgage from family member

Post by LadyGeek »

This thread is now in the Personal Finance (Not Investing) forum (mortgage).

I'll pile on here- never, ever do business with a family member.
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drawpoker
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Re: Mortgage from family member

Post by drawpoker »

"Money is the root of all evil"

Agree with the other posters - not a good idea at all.
Lynette
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Re: Mortgage from family member

Post by Lynette »

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Last edited by Lynette on Sat Jan 12, 2019 3:15 am, edited 1 time in total.
Pizzasteve510
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Re: Mortgage from family member

Post by Pizzasteve510 »

I will pile on, and confirm even with security of the house, values can drop more than you imagine. During hard time, taxes can go unpaid, etc.

A scholar friend tells me the quote as translated from the original language translates closer to the "lust for money"

Good luck
curmudgeon
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Re: Mortgage from family member

Post by curmudgeon »

We've done medium-sized loans among several family members over the years with no problems, BUT, we are a pretty close-knit family, and those who were involved in the loans (on both sides) were pretty financially stable. I could see the potential for problems even in my family, though, as there are some who, while nice people, just aren't good at managing money.

We didn't use any external services, but did have a formal note with interest rate and terms. I don't know how it would have stood up to scrutiny by the IRS, especially since the note was not recorded on the title. I think the reporting requirements for this have gotten a bit tighter in recent years, which might make the external service useful.
chicagobear
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Re: Mortgage from family member

Post by chicagobear »

I think a mortgage would be ok as long as you don't lend more than (say) 80% of the house's value. Even if they can't make the current payments at some point, they can't stiff you since the house can't be sold without paying you off.
Professor Emeritus
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Re: Mortgage from family member

Post by Professor Emeritus »

FWIW in our case it worked fine, absolutely no problem. We bought our house from my parents. My inlaws provided CDs as additional security for the first 5 years.
25 year mortgage,paid it off in 12. (lots of incentive to pay off a family mortgage, at least in our case. )
We made outright gifts to our daughters to help get them into houses. One is a young lawyer and the other a PhD in Molecular biology
:happy Right now both daughters are pregnant. :happy
:moneybag So it's kind of an investment in grandchildren. :moneybag

Just one data point. But in general the younger you expect your children to be fully self-supporting the less education they get and the less their lifetime prospects. unfortunately biology does not cooperate. At best They can do 2 out of three of 1)make money 2) go to school, 3) have children
dolphinsaremammals
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Re: Mortgage from family member

Post by dolphinsaremammals »

My grandmother lent me the money to buy my first car, since I needed it to commute to my first job. My Dad drew up the payment schedule including the interest. Hell would have frozen over before I would have failed to pay that on time.
Leemiller
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Re: Mortgage from family member

Post by Leemiller »

It is not just missing payments, you are essentially tying up their money for a 30 year term! You're not giving them a great rate, you are passing along huge interest rate risk. Imagine how bitter feelings will get if (and when) rates start rising. Also, what if property values drop dramatically? Either you or your relative is stuck.
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jimb_fromATL
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Re: Mortgage from family member

Post by jimb_fromATL »

chicagobear wrote:I think a mortgage would be ok as long as you don't lend more than (say) 80% of the house's value. Even if they can't make the current payments at some point, they can't stiff you since the house can't be sold without paying you off.
If you're the lender, they can stiff you by living in the house but not making the payments. Since you're family, you're not likely to foreclose and have them evicted. They know that, so if they fall on hard times --or if they're just irresponsible-- they're going to pay the people who will take their car or boat or sue them and/or garnishee their wages before they pay you. So whether it's by accident or intention that they don't pay you, you're going to lose money, and there are going to be some really hard feelings that are going to make family get-togethers pretty awkward. I've seen it happen to several families, including relatives.

jimb
ddunca1944
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Re: Mortgage from family member

Post by ddunca1944 »

We loaned my son the money to purchase a house. He signed a promissary note and we hold a lien on the property.
He was injured some months ago and has not been able to work, so is behind on payments.
We do not need the money so it has not caused us a hardship; we'd write it off as a gift, but he won't accept a gift.
We have the amortization schedule attached to our wills with instructions to the executor to forgive the note and distribute an amount equal to the balance to his brother. (The brother is unaware of the loan).
Topic Author
atDev
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Re: Mortgage from family member

Post by atDev »

The loan wouldn't be for the entire mortgage balance. It would mainly be used as a part of a refinance to help keep a lower rate on some of the money and give the family member a better return. It also probably wouldn't be for 30 years.

The equity in the house is about 40% of the value.

I now see all of the unknowns and variables involved in this especially with wills/trusts and inheritance down the line if some life changing event were to happen that either caused me to lose work or if the person loaning the money died or was in a situation where they needed the money back immediately. Thanks for the feedback!
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technovelist
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Re: Mortgage from family member

Post by technovelist »

Professor Emeritus wrote:FWIW in our case it worked fine, absolutely no problem. We bought our house from my parents. My inlaws provided CDs as additional security for the first 5 years.
25 year mortgage,paid it off in 12. (lots of incentive to pay off a family mortgage, at least in our case. )
We made outright gifts to our daughters to help get them into houses. One is a young lawyer and the other a PhD in Molecular biology
:happy Right now both daughters are pregnant. :happy
:moneybag So it's kind of an investment in grandchildren. :moneybag

Just one data point. But in general the younger you expect your children to be fully self-supporting the less education they get and the less their lifetime prospects. unfortunately biology does not cooperate. At best They can do 2 out of three of 1)make money 2) go to school, 3) have children
True for daughters, not so much for sons.
In theory, theory and practice are identical. In practice, they often differ.
Wasatcher
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Re: Mortgage from family member

Post by Wasatcher »

I'll weigh in and add that DW and I provided financing on DW's brother's home early in his marriage. Interest and terms were more favorable than available from traditional lenders but provided better returns than alternatives available to us. Both sides were optimistic and naive. All the pitfalls described by others could easily have happened. Fortunately it worked out fine; we were paid in full with interest when they refinanced a few years later. Better to be lucky than good. In the future, would provide family support only in the form of gifts. Family relationships are too important the gum up with financial conflict.
lululu
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Re: Mortgage from family member

Post by lululu »

technovelist wrote:
Professor Emeritus wrote:FWIW in our case it worked fine, absolutely no problem. We bought our house from my parents. My inlaws provided CDs as additional security for the first 5 years.
25 year mortgage,paid it off in 12. (lots of incentive to pay off a family mortgage, at least in our case. )
We made outright gifts to our daughters to help get them into houses. One is a young lawyer and the other a PhD in Molecular biology
:happy Right now both daughters are pregnant. :happy
:moneybag So it's kind of an investment in grandchildren. :moneybag

Just one data point. But in general the younger you expect your children to be fully self-supporting the less education they get and the less their lifetime prospects. unfortunately biology does not cooperate. At best They can do 2 out of three of 1)make money 2) go to school, 3) have children
True for daughters, not so much for sons.
It's not 1950.
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Abe
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Re: Mortgage from family member

Post by Abe »

jimb_fromATL wrote: If you're the lender, they can stiff you by living in the house but not making the payments. Since you're family, you're not likely to foreclose and have them evicted. They know that, so if they fall on hard times --or if they're just irresponsible-- they're going to pay the people who will take their car or boat or sue them and/or garnishee their wages before they pay you. So whether it's by accident or intention that they don't pay you, you're going to lose money, and there are going to be some really hard feelings that are going to make family get-togethers pretty awkward. I've seen it happen to several families, including relatives.
jimb
I agree with this. A good rule of thumb is never lend to anyone you would be reluctant to foreclose on.
You will be at the bottom of the priority list of people to pay.
Slow and steady wins the race.
letsgobobby
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Re: Mortgage from family member

Post by letsgobobby »

Taking the opposite side, I borrowed, twice, from my dad, with no problems.

The first time was straight out of residency. I needed an additional 10% for a down payment. I paid it back over 12 months or so. We had a formal note, interest, etc.

The second time was last summer. I bought an investment property for $187k and had $26k down. I had sufficient investments to pay cash but would have had to sell, realize gains, and pay 25% capital gains taxes. If I had borrowed from a bank I would have had to come up with closer to $37k down, would have had to pay appraisal and other lending costs, etc. Instead it was in my best interest and my dad's to lend me $160k x 12 years at 3.25%. Market rate, but the interest stays in the family, I got expedited funding, I was able to avoid unnecessary fees, and I was able to bid for the property with a cash offer.

It works out well for us. That said I have an outstanding 20+ year credit history, a very secure and high-paying job, and sufficient assets to pay off the loan any time; furthermore this is pocket change for my dad, I'm the executor of his estate, and the beneficiary of his estate as well. So our situation is not typical.
Afty
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Re: Mortgage from family member

Post by Afty »

Suppose you do lend money to family. Do you have to pay income tax on the interest you receive?
letsgobobby
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Re: Mortgage from family member

Post by letsgobobby »

Afty wrote:Suppose you do lend money to family. Do you have to pay income tax on the interest you receive?
my dad reports the interest. I deduct the interest.
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