Personal loan to a family member

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DEZ1
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Personal loan to a family member

Postby DEZ1 » Tue Jul 11, 2017 10:20 pm

I would like to make a large interest free loan to a family member however I am somewhat worried about getting it back. Since the purpose loan is to buy a home how do I set it up so that I can have a lien on the house until the loan is paid back. What else should I do to protect myself from a default.

ResearchMed
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Re: Personal loan to a family member

Postby ResearchMed » Tue Jul 11, 2017 10:28 pm

DEZ1 wrote:I would like to make a large interest free loan to a family member however I am somewhat worried about getting it back. Since the purpose loan is to buy a home how do I set it up so that I can have a lien on the house until the loan is paid back. What else should I do to protect myself from a default.


How to protect yourself from a default?
Do not lend money to a relative.

No matter what happens/however it happens, IF there is a problem with repayment, it is going to get extraordinarily difficult.

Would you really go ahead an force a sale (because you have a lien) and toss the relative out of his/her house?
Because that is the type of argument/plea you'd likely get IF it really got to that.
And otherwise, why go to the trouble of getting a lien?

Why can't the relative get a regular mortgage, even if for a lower priced home?

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DEZ1
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Re: Personal loan to a family member

Postby DEZ1 » Tue Jul 11, 2017 10:29 pm

I would not throw them out of the house, I just would make sure that if there is a refinance or additional loan on the property that it would come to me first.

ResearchMed
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Re: Personal loan to a family member

Postby ResearchMed » Tue Jul 11, 2017 10:35 pm

DEZ1 wrote:I would not throw them out of the house, I just would make sure that if there is a refinance or additional loan on the property that it would come to me first.


But how would you "make sure" of that, if push came to shove.
If the relative was already having difficulty with repayment, and somehow got another loan, how would *you* get that money?

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Raymond
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Re: Personal loan to a family member

Postby Raymond » Tue Jul 11, 2017 10:36 pm

Does your relative qualify for a mortgage from a bank or mortgage company?

If not, why not?

If you do lend him the money, and you have a lien, contract or whatever on the house, are you prepared to toss your relative and his family out on the street when he stops paying you?
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DEZ1
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Re: Personal loan to a family member

Postby DEZ1 » Tue Jul 11, 2017 10:38 pm

The lien would stop him from getting any additional loans on the property until he gets the lien released by repaying the money.

DEZ1
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Re: Personal loan to a family member

Postby DEZ1 » Tue Jul 11, 2017 10:41 pm

Raymond wrote:Does your relative qualify for a mortgage from a bank or mortgage company?

If not, why not?

If you do lend him the money, and you have a lien, contract or whatever on the house, are you prepared to toss your relative and his family out on the street when he stops paying you?


He does qualify for a mortgage and or loan from the bank but He had overruns during the construction and needs the money to finish the house.

I am not looking to toss the family out of the house, just looking to make sure that I get paid and in case I don't know additional money can be taken out of the house in the form of a loan or an additional line of credit without paying me up first.

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Re: Personal loan to a family member

Postby ResearchMed » Tue Jul 11, 2017 10:42 pm

DEZ1 wrote:The lien would stop him from getting any additional loans on the property until he gets the lien released by repaying the money.


I'm not sure it always works that way.

A lien could interfere with a sale, or make it more difficult, but not necessarily something like a HELOC.
I think the lender would just need to determine that there was more equity (enough "extra") above and beyond any existing mortgage (such as the one from you).

This may vary by jurisdiction; I'm not sure.
And I'm also *not* sure how all the variations of such loans would or might work.

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MathWizard
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Re: Personal loan to a family member

Postby MathWizard » Tue Jul 11, 2017 10:56 pm

I'm not sure why you would like to loan the money, but are worried about getting it back.

We loaned to parents, since what they gave us was much more valuable.

I have money to a brother who had helped me out.

I would loan or give money to kids if they needed it.

Short of life or death, which this isn't , I would not loan money if I had to have it paid back. If it was a sure bet that the money would be paid back, they could get a loan from a bank.

For my kids, if we make sure we have enough, they will likely inherit hundreds of thousands, so e.g. a loan of 20 or 30K which would be a lot , could likely easily be settled by the estate.

You haven't said who the relative, so I assume a sibling with a spouse or children. I wouldn't do it for further away than that, like a nephew. Given I've never had a new house, much less cost overruns on one, I wouldn't be inclined to help a nephew get something I never had.

runner3081
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Re: Personal loan to a family member

Postby runner3081 » Tue Jul 11, 2017 11:17 pm

Don't loan more than you are ready to give away and never get back.

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Watty
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Re: Personal loan to a family member

Postby Watty » Tue Jul 11, 2017 11:25 pm

DEZ1 wrote:What else should I do to protect myself from a default.


In addition to default you also need to consider all the permutations of things like death, divorce, bankruptcy, remarriage, etc that can happen. You would really need to have a lawey set this up.

I would think that it would be better to buy the house in your name then let them rent it from you.

If this is for something like supporting a parent you may be able to claim them as a dependent on your tax return insome situation,

You should also check with an accountant to find out if you would need to file any forms to report the intereest free part of the deal since that would be a likely be considered a gift.

arsenalfan
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Re: Personal loan to a family member

Postby arsenalfan » Tue Jul 11, 2017 11:43 pm

Conventional wisdom is a loan to friends/family = a gift you will never see repaid.

Any higher expectation is a setup for disappointment/a turn for the worse in the relationship.

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F150HD
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Re: Personal loan to a family member

Postby F150HD » Tue Jul 11, 2017 11:54 pm

Conventional wisdom is a loan to friends/family = a gift you will never see repaid.


could giving $$ in this way be considered a 'gift' and generate some form of taxable event?

https://www.irs.gov/pub/irs-pdf/i709.pdf

Frisco Kid
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Re: Personal loan to a family member

Postby Frisco Kid » Wed Jul 12, 2017 7:12 am

The only time we loaned money to a family member was to avoid their house going into foreclosure. They did get back on their feet and repay the loan although it took several years longer than what we agreed on. Asking for overdue payments was quite uncomfortable for my wife and I. In this case it sounds like the person needing the $ may have stretched themselves a bit far financially, if this is the case paying the loan back could prove problematic.

Swimmer
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Re: Personal loan to a family member

Postby Swimmer » Wed Jul 12, 2017 7:13 am

IMO a loan to a relative, however well intended, can backfire. You don't say what the amount involved is. Based on my unpleasant experience with a loan from my parents when we first married, we decided that if we couldn't afford to give the money to our kids, we would not lend it. A loan seems to build a wall between family members and creates psychological dynamics best avoided. Good luck with your decision. YMMV

queso
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Re: Personal loan to a family member

Postby queso » Wed Jul 12, 2017 7:15 am

We discussed this one way back when before getting married. If a family member needs a place to sleep, no problem. Need a meal or a shower or need to borrow a vehicle, no problem. Need money? Sorry, can't do that one. We can do anything else to help you out, but giving you money isn't one of them.

danaht
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Re: Personal loan to a family member

Postby danaht » Wed Jul 12, 2017 7:27 am

My experience - loans to relatives are usually not paid back. You'll have to make a decision if you want to give this money to your relative.

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fandango
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Re: Personal loan to a family member

Postby fandango » Wed Jul 12, 2017 7:30 am

We have loaned money to a relative in what we thought was "dire straits".

One of our relatives lost his job, and our entire family loaned him money to help his family out. This continued for several years.
Eventually he found work again.

We have recently discovered he had significant property assets and a very large 401k during that time that he never revealed to us. He could have easily supported his family until he found another job.

None of us ever received a thank you from him for our sacrifices. The money has not been paid back.

A bank would have looked a the situation objectively and required "full disclosure" before granting a loan.

Best to keep family and business separate.

Swimmer
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Re: Personal loan to a family member

Postby Swimmer » Wed Jul 12, 2017 7:31 am

I mean no offense, but have you asked yourself WHY you "would like" to make this loan?

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jharkin
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Re: Personal loan to a family member

Postby jharkin » Wed Jul 12, 2017 8:02 am

Don't do it.

These situations ruin relationships and there is a very good chance you may never get it back. In my 20s I loaned quite a bit (mid 5 figures over a span of 5+ years when I was only making mid 5 figures) to immediate family members who where in serious financial distress. All it did was enable them to continue their problems, caused long term stress in the relationship that never fully healed, and I never got the money back.

Longer term that loss meant I am still paying off some of my own debts (college) 15 years later and it probably set my own financial planning back a few years. I would probably be a millionaire already if I had just said no and used the funds to fix my own situation back then. See my recent buying a bigger house thread where the membership here thoroughly spanked me for my "past mistakes" for reference....

researcher
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Re: Personal loan to a family member

Postby researcher » Wed Jul 12, 2017 8:22 am

DEZ1 wrote:I would like to make a large interest free loan to a family member however I am somewhat worried about getting it back.

If you are "worried about getting it back," then why are you even considering loaning a single penny?
That is a clear sign you should absolutely not move forward with this loan.
Even with a lien in place, it doesn't mean you'll ever see your money again.

I've loaned money to family/friends over the years, and have never had a problem getting my money back.
However, I've never went into a loan being "worried about getting it back."
There are family members I would feel that way about, and I DON'T lend those people money!!!

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Uncle Pennybags
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Re: Personal loan to a family member

Postby Uncle Pennybags » Wed Jul 12, 2017 8:23 am

OP say;
I’m sorry, my good fellow, but all my money is tied up in currency.
W. C. Fields

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flamesabers
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Re: Personal loan to a family member

Postby flamesabers » Wed Jul 12, 2017 8:25 am

DEZ1 wrote:I would like to make a large interest free loan to a family member however I am somewhat worried about getting it back. Since the purpose loan is to buy a home how do I set it up so that I can have a lien on the house until the loan is paid back. What else should I do to protect myself from a default.


Generally speaking I think it's best to not mix personal relationships with business matters. If you aren't willing to gift the money to your family member, don't make the loan. Trying to collect money from an uncooperative lendee is hard enough as it is. When the uncooperative lendee is also a family member, you're bound to create a lot of family drama. Nobody wants to be the bad guy for trying to collect money from a family member who is unable/unwilling to pay up.

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TomatoTomahto
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Re: Personal loan to a family member

Postby TomatoTomahto » Wed Jul 12, 2017 8:31 am

DEZ1 wrote:He does qualify for a mortgage and or loan from the bank but He had overruns during the construction and needs the money to finish the house.

Not to be cold, but not having a contingency for this seems like poor planning, since I believe the last time construction didn't run over budget was never.

If you need the money, don't lend it. If you would feel bad "gifting" the money, don't lend it.

Has he tried the bank?

Jack FFR1846
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Re: Personal loan to a family member

Postby Jack FFR1846 » Wed Jul 12, 2017 8:37 am

And why are there cost over-runs?
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BTDT
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Re: Personal loan to a family member

Postby BTDT » Wed Jul 12, 2017 8:38 am

One advantage to loaning money to relatives is they never ask for more money as they never paid off their first loan. With the exception of one 'book' loan we are batting over 300% on loan losses.

If you want to lose a friend or relative just loan them some money. :oops:
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mouses
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Re: Personal loan to a family member

Postby mouses » Wed Jul 12, 2017 8:41 am

DEZ1 wrote:I would like to make a large interest free loan to a family member however I am somewhat worried about getting it back. Since the purpose loan is to buy a home how do I set it up so that I can have a lien on the house until the loan is paid back. What else should I do to protect myself from a default.


In general, this is a recipe for losing the money you loan them. Other people who replied have spelled out all the ways this can go wrong.

Have them ask the bank for an additional loan. If the bank says no, they will have to tighten up the partly constructed house to protect it from the weather and save up until they can complete it.

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8foot7
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Re: Personal loan to a family member

Postby 8foot7 » Wed Jul 12, 2017 8:43 am

I'll add to the chorus. Give them whatever money you want to give them, but do not loan it to them. If you don't want to give anything, then don't give or loan.

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flamesabers
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Re: Personal loan to a family member

Postby flamesabers » Wed Jul 12, 2017 8:48 am

BTDT wrote:One advantage to loaning money to relatives is they never ask for more money as they never paid off their first loan.


I was under the impression that relatives who have trouble managing their money will keep asking for more money if they think they can get it.

123
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Re: Personal loan to a family member

Postby 123 » Wed Jul 12, 2017 8:53 am

The only way to ensure that you are paid first before any other lien holders is for you to be the primary lender for the property. This would likely involve a refinance where all existing loans are paid off as you front the money for the refinancing mortgage. As the first mortgage holder you don't have to require any down payment whatsoever and the terms and conditions of repayment would be up to you. There is a chance that at some point they could simply walk away from the property due to job loss, marital difficulties, illness, or a whole lot of other circumstances.

As the primary lender you are essentially buying the property yourself. If they are overextending themselves in acquiring the property they may not be able to support it. There is a chance that a foreclosure sale of the property would yield you less then the outstanding amount of your loan.
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dm200
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Re: Personal loan to a family member

Postby dm200 » Wed Jul 12, 2017 8:55 am

DEZ1 wrote:I would like to make a large interest free loan to a family member however I am somewhat worried about getting it back. Since the purpose loan is to buy a home how do I set it up so that I can have a lien on the house until the loan is paid back. What else should I do to protect myself from a default.


I suspect that any kind of loan agreement you have will probably affect (negatively) on the ability of that family member to get needed financing. I would check to see if that is the case.

Or, is it the intent and amount that this loan will fiance the entire purchase? Lat's say that is the case, and you have the first lien - can you and will you foreclose on the house and put them on the street?

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dm200
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Re: Personal loan to a family member

Postby dm200 » Wed Jul 12, 2017 9:00 am

A wise woman I knew for decades was always being approached by family members for loans. She once told me she was glad when they stiffed her because they would never get another such "loan".

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8foot7
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Re: Personal loan to a family member

Postby 8foot7 » Wed Jul 12, 2017 9:02 am

flamesabers wrote:
BTDT wrote:One advantage to loaning money to relatives is they never ask for more money as they never paid off their first loan.


I was under the impression that relatives who have trouble managing their money will keep asking for more money if they think they can get it.


It's a built in reason for denying the request. If you don't have the cojones to tell a family member who already stiffed you that you aren't going to give them still more money, then...

pinecone
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Re: Personal loan to a family member

Postby pinecone » Wed Jul 12, 2017 9:07 am

Being able to build a new house (not to mention exceeding the budget) is a luxury. I'm not inclined to finance anyone's luxuries. This is not a case where someone will die or go hungry. If they can't afford to finish the construction, how are they going to afford furnishing, decorating, landscaping, and maintaining this home?

The most valuable lesson someone can learn is how to live within their means - the sooner, the better. You'll do them no favors by propping them up, and they will come to resent being beholden to you via a loan.

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Re: Personal loan to a family member

Postby KlangFool » Wed Jul 12, 2017 9:11 am

DEZ1 wrote:I would like to make a large interest free loan to a family member however I am somewhat worried about getting it back. Since the purpose loan is to buy a home how do I set it up so that I can have a lien on the house until the loan is paid back. What else should I do to protect myself from a default.


DEZ1,

Don't do it.

1) You are not helping the person. If the person needs an interest-free loan in order to buy the house, the person cannot afford the house. So, your loan is putting the person into a house that he/she cannot afford, you are not helping the person.

2) Give some money to this person. Whatever amount that you can afford to lose if you want to help.

KlangFool

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dm200
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Re: Personal loan to a family member

Postby dm200 » Wed Jul 12, 2017 9:11 am

Hard feelings example:

A sibling and spouse had a mortgage and my father offered to refinance the loan at a lower rate. There was no difficulty in their credit etc. He did, however, insist on being the lienholder on the house. The spouse was very resentful that he placed the restriction. [There may have been other issues involved, but I don;t know]

ResearchMed
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Re: Personal loan to a family member

Postby ResearchMed » Wed Jul 12, 2017 9:15 am

123 wrote:The only way to ensure that you are paid first before any other lien holders is for you to be the primary lender for the property. This would likely involve a refinance where all existing loans are paid off as you front the money for the refinancing mortgage. As the first mortgage holder you don't have to require any down payment whatsoever and the terms and conditions of repayment would be up to you. There is a chance that at some point they could simply walk away from the property due to job loss, marital difficulties, illness, or a whole lot of other circumstances.

As the primary lender you are essentially buying the property yourself. If they are overextending themselves in acquiring the property they may not be able to support it. There is a chance that a foreclosure sale of the property would yield you less then the outstanding amount of your loan.


OP seemingly expressed the belief that being primary lien holder would prevent the borrower from borrowing any additional funds without being required to turn those new funds over to OP.

DEZ1 wrote:The lien would stop him from getting any additional loans on the property until he gets the lien released by repaying the money.

AFAIK, something like HELOC doesn't require the full refinancing where all loans (old and/or new) are rolled into a single new mortgage.
Those usually require that there be additional sufficient equity (above existing liens and a buffer) to support *another* loan.
And the relative could just keep that new money.

That was a very different concern that the "order of repayment" upon a sale (or foreclosure) that tends to favor the first lien holder.

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Re: Personal loan to a family member

Postby 123 » Wed Jul 12, 2017 9:19 am

DEZ1 wrote:I would not throw them out of the house...


If you would not throw them out of the house for non-payment why would they pay you anything back? If a bank gave someone similar terms its likely most people would not pay the bank. Eviction/foreclosure is the only control on repayment that has been established to generally work over time.
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Re: Personal loan to a family member

Postby Pajamas » Wed Jul 12, 2017 9:27 am

DEZ1 wrote:I would like to make a large interest free loan to a family member however I am somewhat worried about getting it back. Since the purpose loan is to buy a home how do I set it up so that I can have a lien on the house until the loan is paid back. What else should I do to protect myself from a default.


A lien might not help you if your loan is large enough and the value of the house drops enough and there are other scenarios in which the loan might not ever be repaid. Nothing you can do will provide absolute protection. So don't even consider making this loan (or any other loan) unless you are willing to accept at least the possibility of it not being repaid.

The primary mortgage holder usually has the best protection against default, as someone already said above. If you do make the loan, treat it as a bank would, with a formal repayment schedule and all the associated paperwork completed and filed and be willing to foreclose if necessary. If you are not willing to do that, you should acknowledge that you are basically making a gift with only the hope of being repaid.

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Re: Personal loan to a family member

Postby msk » Wed Jul 12, 2017 9:28 am

Perhaps you could give a bank guarantee to the mortgage lender to raise the mortgage ceiling? That way your money earns interest (as in a CD) and the house cannot be sold or refinanced without the knowledge of the mortgage lender. Presumably you can also have a written guarantee that once the mortgage lender gets his loan cleared (e.g. through a foreclosure sale) then you are due next for release of your bank guarantee. Messy, but if you cannot or would not simply give the money then a possible halfway house...

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flamesabers
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Re: Personal loan to a family member

Postby flamesabers » Wed Jul 12, 2017 9:32 am

8foot7 wrote:
flamesabers wrote:I was under the impression that relatives who have trouble managing their money will keep asking for more money if they think they can get it.


It's a built in reason for denying the request.


I think this is true for unrelated parties. However, when it comes to relatives it can be a bit of a slippery slope due to the emotional pressure of helping out a relative who is having a (unpredictable or otherwise) financial crisis. I agree denying a second loan on the basis the first loan hasn't yet been repaid is a valid reason, but that doesn't eliminate the risk of your family treating you like an Ebenezer Scourge because you value your money more then the well-being of a relative.

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HueyLD
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Re: Personal loan to a family member

Postby HueyLD » Wed Jul 12, 2017 9:32 am

To the OP,

Is that family member your child? If so, you may as well give the child his/her inheritance in advance.

If the family member is your parent, you may also gift the money to show your gratitude.

Anyone else, no way Jose.

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Re: Personal loan to a family member

Postby bloom2708 » Wed Jul 12, 2017 9:33 am

Your relationship with the family member will forever be changed if you do borrow.

I don't recommend it.

Nothing good can come of it. Even if the "need" it.
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Re: Personal loan to a family member

Postby bottlecap » Wed Jul 12, 2017 9:42 am

DEZ1 wrote:I would like to make a large interest free loan to a family member however I am somewhat worried about getting it back. Since the purpose loan is to buy a home how do I set it up so that I can have a lien on the house until the loan is paid back. What else should I do to protect myself from a default.


Loan them the money, have a lawyer draft a mortgage, record the mortgage and pay the recording fees.

Gift them the interest every year. You may or may not have to pay gift taxes every year depending upon the size of the loan (probably not, though). Pay income taxes every year on the imputed interest the IRS will consider you to have received.

Unless you are really lucky, realize that you are unlikely to ever be paid back on this "loan." Because you state that you are "worried about getting it back", this is doubly true.

And the home will go into disrepair, and you won't have the right to do anything about it, because it is not your home. Hopefully, the "homeowner" will insure the property that they have no equity interest in. Otherwise, you will have to.

If you ever want the "loan" money back, you will likely have to foreclose and then evict, if you are entitled to, depending upon the laws of your state.

Good luck,

JT
Last edited by bottlecap on Wed Jul 12, 2017 9:48 am, edited 3 times in total.

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BTDT
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Re: Personal loan to a family member

Postby BTDT » Wed Jul 12, 2017 9:46 am

8foot7 wrote:
flamesabers wrote:
BTDT wrote:One advantage to loaning money to relatives is they never ask for more money as they never paid off their first loan.


I was under the impression that relatives who have trouble managing their money will keep asking for more money if they think they can get it.


It's a built in reason for denying the request. If you don't have the cojones to tell a family member who already stiffed you that you aren't going to give them still more money, then...


All our loans have been to inlaws/outlaws and I suspect my better-half has warned them they get only one trip to the trough. I have no problem saying no-mas to anyone.......except my wife :sharebeer
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8foot7
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Re: Personal loan to a family member

Postby 8foot7 » Wed Jul 12, 2017 9:48 am

BTDT wrote:All our loans have been to inlaws/outlaws and I suspect my better-half has warned them they get only one trip to the trough. I have no problem saying no-mas to anyone.......except my wife :sharebeer


If you're loaning money to your wife then you might have bigger problems ;) :sharebeer

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Re: Personal loan to a family member

Postby michaeljc70 » Wed Jul 12, 2017 9:48 am

pinecone wrote:Being able to build a new house (not to mention exceeding the budget) is a luxury. I'm not inclined to finance anyone's luxuries. This is not a case where someone will die or go hungry. If they can't afford to finish the construction, how are they going to afford furnishing, decorating, landscaping, and maintaining this home?

The most valuable lesson someone can learn is how to live within their means - the sooner, the better. You'll do them no favors by propping them up, and they will come to resent being beholden to you via a loan.


This.

OP said it is a "large" loan, so this doesn't seem to be a simple cash flow issue. If they built a house that is worth more than it appraises for, they are in the hole already. If it appraises, it seems like they should be able to get a larger mortgage if they can afford the home.

CurlyDave
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Re: Personal loan to a family member

Postby CurlyDave » Wed Jul 12, 2017 9:50 am

Every time I have loaned money to a friend/relative I have kissed off the money before I gave it to them.

If they repay, they are good people, if they do not -- that is expected.

I never disclose our net worth to anyone except mortgage lenders. Any private party who sees that you have accumulated what is a normal portfolio for Bogleheads will consider you the source of all wealth forever.

nyclon
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Re: Personal loan to a family member

Postby nyclon » Wed Jul 12, 2017 9:52 am

DEZ1 wrote:I would like to make a large interest free loan to a family member however I am somewhat worried about getting it back. Since the purpose loan is to buy a home how do I set it up so that I can have a lien on the house until the loan is paid back. What else should I do to protect myself from a default.


There's nothing you can do here.

Of course you can set up contracts, but if push came to shove, think about how it would actually play out. Not legally, but from a relationship point of view - how would it affect your family? And would you be willing to pursue legal action?

Best advice: don't lend to family.

KlangFool
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Re: Personal loan to a family member

Postby KlangFool » Wed Jul 12, 2017 9:56 am

DEZ1 wrote:
Raymond wrote:Does your relative qualify for a mortgage from a bank or mortgage company?

If not, why not?

If you do lend him the money, and you have a lien, contract or whatever on the house, are you prepared to toss your relative and his family out on the street when he stops paying you?


He does qualify for a mortgage and or loan from the bank but He had overruns during the construction and needs the money to finish the house.


DEZ1,

This is a lame excuse. So, what are you going to do for him if he needs money to furnish the house? This is not the end. It is just the beginning of a stream of requests for money from him.

KlangFool


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