Personal loan to a family member

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
c078342
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Re: Personal loan to a family member

Post by c078342 » Fri Jul 14, 2017 2:07 pm

ALWAYS a bad idea to become involved financially with family. Some years ago my wife and her sister went into the purchase of a house near the sister for their parents who were getting to the point of not being able to live alone. It was a 50/50 deal predicated on the expectation that their parents existing home would be sold "quickly" -- within a few months -- and the parents would assume most of the expenses of the new house, which they could afford. We kicked in $30k for the down payment. Well, selling the existing proved to be impossible -- the mother was a hoarder and could not part with anything. The few months turned into a year and a half so we told the sister we wanted out and gave her a quit claim deed for my wife's share. Probably naively, in an attempt to preserve some semblance of family unity, we didn't ask for out $30k back. They are about to sell the sister's and their mother's houses and buy one where they all can live. Not having an agreement in writing was a failure on our (my) part, but it was family, so a handshake was all that was necessary. They probably think the $30k share was discharged with the quit claim, and it probably was, but if the sister realizes a profit on the property, we think she has a moral responsibility to reimburse us. Not that we are planning on a windfall. The bottom line, don't get involved in family finances without a firm written agreement. And from my perspective, just don't get involved.

VaR
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Re: Personal loan to a family member

Post by VaR » Fri Jul 14, 2017 11:15 pm

I have a 100% loss rate for personal loans to relatives. I'm convinced that the advice you always hear is not just about the need for emotional preparedness, but rather it is a hidden correlation between "needing to ask a relative for a loan" and "fiscal irresponsibility". The correlation must cause the loan loss rate to be astronomical.

If you're going to move forward with it, I would structure and document the loan such that when your relative defaults, you can take the loan loss as a deduction. I'm not sure how to do this so I'll have to depend on others here to advise on whether this is really possible.

Dottie57
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Re: Personal loan to a family member

Post by Dottie57 » Fri Jul 14, 2017 11:39 pm

Listen to those who say not to lend unless you are willing to lose the money.

However, my dad (and mom) did lend me the money for a new car when I got my first full time job. Dad had an agreement which I signed. It gave the term of the loan, amount and day of the month the payment was expected. I did pay the loan off.
I think dad just wanred me to have a safe car. My used cars (bought from him at nominal price) kept breaking down. No mechanically minded people in my family.

If I had defaulted, my dad would not have missed the money. Don't lend money that you want back.

CFM300
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Re: Personal loan to a family member

Post by CFM300 » Sat Jul 15, 2017 2:55 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.
Bingo!

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Uncle Pennybags
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Re: Personal loan to a family member

Post by Uncle Pennybags » Sun Jul 16, 2017 2:45 pm

VaR wrote:..."needing to ask a relative for a loan" and "fiscal irresponsibility". The correlation must cause the loan loss rate to be astronomical...
So true, if a professional lender won't lend stay away.

michaeljc70
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Re: Personal loan to a family member

Post by michaeljc70 » Sun Jul 16, 2017 2:59 pm

VaR wrote:I have a 100% loss rate for personal loans to relatives. I'm convinced that the advice you always hear is not just about the need for emotional preparedness, but rather it is a hidden correlation between "needing to ask a relative for a loan" and "fiscal irresponsibility". The correlation must cause the loan loss rate to be astronomical.

If you're going to move forward with it, I would structure and document the loan such that when your relative defaults, you can take the loan loss as a deduction. I'm not sure how to do this so I'll have to depend on others here to advise on whether this is really possible.
That would also typically be taxable to the borrower as a forgiven debt.

Saving$
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Re: Personal loan to a family member

Post by Saving$ » Sun Jul 16, 2017 4:02 pm

Watty wrote:One thing that was not clear is how much equity that relative has in the house.

If they already had to put up 20% of the cost of the planned cost house and they could only finance 80% but then the cost overrun was 10% then there would be a margin of safety for you.

Helping them out is one thing but making it a zero interest loan is a very bad idea. You loan should be at a slightely higher interest rate (5%+ ??) to modivate them to pay you off first even if they have to refinance the house once it is done. You could give the interest back to them after the loan is paid off if you wanted to. You could even write it into the contract that the interest will be forgivien if it is paid off by a certain date.

One other thing that has not been mentioned is that you loaning them money could cause problems with their financing if their loan had to go through underwritting again when it is converted from a construstion loan to a regular mortage. I suspect this may not be a problem but they should make sure that anything they do is OK with their lender

They should also not have any other way to finance extra money that is needed. For example could they;
1) Get loans on paid off cars
2) Get a 401k loan.

Another option might be to cut back on some of the other features of the house if it is not too late for that. For example they may be able to put less expensive appliances in the kitchen or have smaller decks and patios. They could upgrade those later on when they have the money.
This.

I'm very surprised at the number of posts against this, and the few posts that answer the OP's question.
In the above example, I could easily envision a financially responsible sibling who saves and puts down $80k of a $400k house, with a $320k loan, which might be the max the bank will lend based on income. In the course of construction, costs rise to $420k, so the sibling is strapped...and the OP wants to help sibling, but protect their $20k, as $20k is a significant amount...this is not unreasonable. I can see a similar situation in which the person is doing the construction themselves, and is now maintaining both the bank loan and the loan on their existing primary residence. OP wants to help sibling get out of this.

The above advice about a 2nd mortgage is good, as is the link about National Family Mortgage. There was a post several years ago that linked to National Family Mortgage and a few other similar services, so there are apparently others out there.

...and in regards to the other posters parents, who took a loan from grandma for a mountain cabin so grandma could get a higher return on her CD's, and people wondering why the parents did not just gift grandma the difference between her return on CD's and the interest rate they paid. Maybe the deduction was higher than the difference? Maybe the mortgage interest allowed the parents to itemize in a way that was beneficial? I can see alot of scenarios where this would work out well.

littlebird
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Location: Valley of the Sun, AZ

Re: Personal loan to a family member

Post by littlebird » Sun Jul 16, 2017 4:05 pm

c078342 wrote:ALWAYS a bad idea to become involved financially with family. Some years ago my wife and her sister went into the purchase of a house near the sister for their parents who were getting to the point of not being able to live alone. It was a 50/50 deal predicated on the expectation that their parents existing home would be sold "quickly" -- within a few months -- and the parents would assume most of the expenses of the new house, which they could afford. We kicked in $30k for the down payment. Well, selling the existing proved to be impossible -- the mother was a hoarder and could not part with anything. The few months turned into a year and a half so we told the sister we wanted out and gave her a quit claim deed for my wife's share. Probably naively, in an attempt to preserve some semblance of family unity, we didn't ask for out $30k back. They are about to sell the sister's and their mother's houses and buy one where they all can live. Not having an agreement in writing was a failure on our (my) part, but it was family, so a handshake was all that was necessary. They probably think the $30k share was discharged with the quit claim, and it probably was, but if the sister realizes a profit on the property, we think she has a moral responsibility to reimburse us. Not that we are planning on a windfall. The bottom line, don't get involved in family finances without a firm written agreement. And from my perspective, just don't get involved.
Were you helping support the house after you quitclaimed it over to the sister; taxes, insurance, repairs, maintenance, sale costs? Did you take on the risk that the house might incur some uncompensated liability or loss even after you washed your hands of it? That it might sell for less than the 2 families contributed? If not, and the sister-in-law was responsible for everything, I, with all due respect, don't see how you can expect to now share in any profit.

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Hawaiishrimp
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Re: Personal loan to a family member

Post by Hawaiishrimp » Sun Jul 16, 2017 4:31 pm

I was thinking about lending my brother in law for their downpayment since we are good friends. However, after realizing that they spent lots of time partying, traveling and chilling out drinking etc... I don't see a point to help out anymore. He and his wide need to sweat a little for their own downpayment, I ain't gonna give a lending hand to folks who party hard.
I save and invest my money, so money can make money for me, so I don't have to make money eventually.

bberris
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Re: Personal loan to a family member

Post by bberris » Sun Jul 16, 2017 4:57 pm

F150HD wrote:
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
If there is a promise to pay, it's not a gift. Even if they never pay, it's not a gift.

Minty
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Re: Personal loan to a family member

Post by Minty » Sun Jul 16, 2017 11:51 pm

I worry about anyone who would get into a construction project without a sufficient contingency reserve. I myself would, as others have said, stay out of it, give the money as a gift, or buy the house, be in first position, and rent it to the relative. From the perspective of the relative who borrows the money, the lender knew about the lack of sufficient resources when they chose to get involved, so the lender cannot decently expect or demand the payment of money which the lender knows simply is not there.
Core Four with nominal bonds and TIPS.

heybro
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Re: Personal loan to a family member

Post by heybro » Mon Jul 17, 2017 3:35 am

Make the money a gift. Pure and Simple. This is the only way.

If you want to help family out, give them the money.

Otherwise, DO NOT DO IT.

If you loan money to family you will lose both your money and your family.

There is no way to protect your money with a lien. The bank and the local property taxes get the money and not you.

Let me put it another way: There are thousands upon thousands of companies, organizations, groups, who's business in the world is to loan people money. They WANT to loan money. They go out of their way to find ways to loan people money. They do this by the millions. They also have great ability to withstand not being paid back EVER. It is but a small dent. So, these people, groups, businesses both WANT to loan money and have very little affect if it is not paid back. If these people are not giving your family a loan, then there is something wrong. Something so wrong that you are no substitute for a mega bank designed solely to do so.

Get it?

Leemiller
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Re: Personal loan to a family member

Post by Leemiller » Mon Jul 17, 2017 7:35 am

I think you need to understand what they could be doing but aren't to deal with this. A 401k loan or taking out a loan or selling cars that are paid off is an example. Another would be working extra hours and significantly cutting back lifestyle. My bank keeps trying to give me personal signature loans according to the offers I get in the mail. It is concerning if all their money is tied up in the house already. What about an emergency fund? What were they going to buy furniture with?

SimonJester
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Re: Personal loan to a family member

Post by SimonJester » Mon Jul 17, 2017 9:08 am

I'm sure other have mentioned this, but unless you are loaning them the entire amount to cover the post construction house price, you will never be in the first position for that mortgage. Some other bank will be first and you will second, or third or...

Another issue, your loan would have to be reporting to the final lender and could mess up their ability to obtain final financing on the completed house.
"They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety." - Benjamin Franklin

LukeHeinz57
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Re: Personal loan to a family member

Post by LukeHeinz57 » Mon Jul 17, 2017 12:21 pm

Give whatever you would feel good about doing. Do not lend a penny. Heartache lies ahead with a borrower lender dynamic. You've been warned! Learn from others mistakes! :oops:
"Contentment", the only thing you ever truly need more of!

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