Personal mortgage loan

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maria00200
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Personal mortgage loan

Post by maria00200 » Sat Aug 12, 2017 10:44 am

I had a question regarding doing a personal mortgage loan to my adult child. Let's say for example I wanted to loan him $60k to help out for a house. (We are in New York). I would need to make it an official loan with signed paperwork through an attorney. Does anyone know if I have to follow whatever the current interest rate is legally? For example, let's say it's 4%. Do I have to do 4% with my son or can I offer him a lower rate of for example, 1%?

Morik
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Re: Personal mortgage loan

Post by Morik » Sat Aug 12, 2017 11:02 am

I am not positive, so have others confirm, but I think it works as follows:
If you charge less than the going market rate for interest, I think you have to count the difference as a gift. E.g., if the going rate is 4% and lets say you make $400/year in interest to keep the math simple. If instead you charged 1% in interest, I think that counts as giving a $300/year gift.

maria00200
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Re: Personal mortgage loan

Post by maria00200 » Sat Aug 12, 2017 11:05 am

I see. What are you allowed to give as a gift annually? (Without incurring any tax fees).

petulant
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Re: Personal mortgage loan

Post by petulant » Sat Aug 12, 2017 11:16 am

There's a lifetime exemption of about $10 million for a married couple, so if you're far under that you have little to worry about. If you get more than $14K in a year, you have to file and it counts toward the exemption. If you give under $14K per year, no filing and no need to count for the exemption. With a mortgage loan value at $60K, I doubt you'll have much to worry about gift taxes.

maria00200
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Re: Personal mortgage loan

Post by maria00200 » Sat Aug 12, 2017 11:22 am

Thanks. For all the parents out there, am I foolish for wanting to charge a lower interest rate for my son? Should I be doing just the regular rate for him? I'm curious how other parents do this in a similar situation.

bberris
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Re: Personal mortgage loan

Post by bberris » Sat Aug 12, 2017 11:26 am

What is the goal here? You do realize that a loan won't help him qualify for a mortgage, but a gift will.

maria00200
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Re: Personal mortgage loan

Post by maria00200 » Sat Aug 12, 2017 11:35 am

The goal was he does not qualify for a mortgage right now, so I was thinking of helping out maybe.

JGoneRiding
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Re: Personal mortgage loan

Post by JGoneRiding » Sat Aug 12, 2017 11:49 am

THe irs has a SPECIFIC family rate for long term loaning it is NOT fair market rate (a lot less) but you MUST charge that rate if you are going to call it a loan or the IRS will impute it for you as income. I believe but you should look it up that it is currently something like 2.15% or close to that. IF you are going to structure a loan you need to charge that rate, otherwise you can gift it and file a gift tax.

You don't have to have a lawyer you are probable capable of making a nice 1 page document and then having it notarized.

If you really want the money back you can become the second lein holder on the property and file it with title/laywer

JGoneRiding
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Re: Personal mortgage loan

Post by JGoneRiding » Sat Aug 12, 2017 11:51 am

maria00200 wrote:
Sat Aug 12, 2017 11:35 am
The goal was he does not qualify for a mortgage right now, so I was thinking of helping out maybe.
if he doesn't qualify chances are good they wont like the loan. you would need to speak with the loan officer but usually they want a letter saying that its a gift if for down payment

michaeljc70
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Re: Personal mortgage loan

Post by michaeljc70 » Sat Aug 12, 2017 12:02 pm

JGoneRiding wrote:
Sat Aug 12, 2017 11:49 am
THe irs has a SPECIFIC family rate for long term loaning it is NOT fair market rate (a lot less) but you MUST charge that rate if you are going to call it a loan or the IRS will impute it for you as income. I believe but you should look it up that it is currently something like 2.15% or close to that. IF you are going to structure a loan you need to charge that rate, otherwise you can gift it and file a gift tax.

You don't have to have a lawyer you are probable capable of making a nice 1 page document and then having it notarized.

If you really want the money back you can become the second lein holder on the property and file it with title/laywer
Correct. The lender will have to pay income tax on the imputed interest.

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dm200
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Location: Washington DC area

Re: Personal mortgage loan

Post by dm200 » Sat Aug 12, 2017 12:11 pm

bberris wrote:
Sat Aug 12, 2017 11:26 am
What is the goal here? You do realize that a loan won't help him qualify for a mortgage, but a gift will.
While the mortgage loan will not help now, perhaps (over a few years) circumstances may change so that he can qualify.

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dm200
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Location: Washington DC area

Re: Personal mortgage loan

Post by dm200 » Sat Aug 12, 2017 12:13 pm

maria00200 wrote:
Sat Aug 12, 2017 10:44 am
I had a question regarding doing a personal mortgage loan to my adult child. Let's say for example I wanted to loan him $60k to help out for a house. (We are in New York). I would need to make it an official loan with signed paperwork through an attorney. Does anyone know if I have to follow whatever the current interest rate is legally? For example, let's say it's 4%. Do I have to do 4% with my son or can I offer him a lower rate of for example, 1%?
There is no legal requirement that you do so; the issue is the collectability of the loan (and whether you care about it).

chevca
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Re: Personal mortgage loan

Post by chevca » Sat Aug 12, 2017 12:29 pm

maria00200 wrote:
Sat Aug 12, 2017 11:35 am
The goal was he does not qualify for a mortgage right now, so I was thinking of helping out maybe.
If he doesn't qualify now, he certainly won't qualify with a $60k loan on his back. If this was to be an actual loan, he should report it when he applies and gives all his debt and income.

I'd say, simply gift him the money for the down payment.

If the interest rate is very low and you have to pay taxes on the minimal interest earnings, what's the point?

Just gift it to him and he's $60k closer to qualifying.

TropikThunder
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Re: Personal mortgage loan

Post by TropikThunder » Sat Aug 12, 2017 6:58 pm

JGoneRiding wrote:
Sat Aug 12, 2017 11:49 am
If you really want the money back you can become the second lein holder on the property and file it with title/laywer
I think this would actually make things harder for him. The primary lender will have to know about (and approve of) the second lien, and in some cases will charge a higher rate on the primary. This is the main reason piggyback loans (80/10/10 etc) have become less popular, as the primary lenders have become less comfortable sharing the interest in the property. I vote with those saying just make it a gift in the first place.

TropikThunder
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Re: Personal mortgage loan

Post by TropikThunder » Sat Aug 12, 2017 7:05 pm

chevca wrote:
Sat Aug 12, 2017 12:29 pm
If he doesn't qualify now, he certainly won't qualify with a $60k loan on his back. If this was to be an actual loan, he should report it when he applies and gives all his debt and income.
Exactly. If he doesn't qualify now, it's most likely due to excessive Debt to Income ratio (DTI). I'm assuming your gift/loan of $60,000 is to give him a bigger down payment to lower his PITI, but if it's a formal loan with formal repayment terms, that loan payment will now also be part of his DTI.

Let's say the repayment terms are the IRS-family-discount rate of 2.15% for 10 years. That's ~$550/month, which will most likely blow up his DTI and he STILL won't qualify. One more vote here to just make it a gift.

Oh, and not a secret loan masquerading as a gift (meaning don't promise the lender it's a gift and then expect him to repay it, that's illegal).

Goal33
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Re: Personal mortgage loan

Post by Goal33 » Sat Aug 12, 2017 7:42 pm

My feeling is that if you need to be formal about loaning your son 60k, you can't afford the loan.
A man with one watch always knows what time it is; a man with two watches is never sure.

michaeljc70
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Re: Personal mortgage loan

Post by michaeljc70 » Sat Aug 12, 2017 10:28 pm

Why doesn't he qualify? Maybe you are just helping him buy something he cannot/should not afford.

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