Short Term Loan / Bridge Loan from Family

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clayr361
Posts: 26
Joined: Tue Aug 19, 2014 2:48 pm

Short Term Loan / Bridge Loan from Family

Post by clayr361 » Thu Apr 26, 2018 10:08 am

My family is moving soon and our house went under contract much sooner than expected. The deal is We are set to close on our home on May 29th. We planned to use the proceeds from that sell as more of a down payment on the new home. We have the %20 down payment for the new home in cash now but wanted to put even more, say %40 down to lower our monthly payments on the new house as it is a more expensive home. We plan to buy and close on a new house sooner than May 29th and have already been approved for the mortgage on a non contingent status.

Could I take a short term loan from family for maybe a month or even less to cover the time between closing on a new house and selling the old one? It will be for more $ than a yearly gift allowance would cover so we can go that route. From what I have read, we need something in writing and to pay the AFR interest on the amount.

What would be the implications if any come tax time for us or my parents? Do we even need to report it at all? We would have the loan documentation as backup if needed.

Thanks in advance for any advice.

ResearchMed
Posts: 7497
Joined: Fri Dec 26, 2008 11:25 pm

Re: Short Term Loan / Bridge Loan from Family

Post by ResearchMed » Thu Apr 26, 2018 10:15 am

clayr361 wrote:
Thu Apr 26, 2018 10:08 am
My family is moving soon and our house went under contract much sooner than expected. The deal is We are set to close on our home on May 29th. We planned to use the proceeds from that sell as more of a down payment on the new home. We have the %20 down payment for the new home in cash now but wanted to put even more, say %40 down to lower our monthly payments on the new house as it is a more expensive home. We plan to buy and close on a new house sooner than May 29th and have already been approved for the mortgage on a non contingent status.

Could I take a short term loan from family for maybe a month or even less to cover the time between closing on a new house and selling the old one? It will be for more $ than a yearly gift allowance would cover so we can go that route. From what I have read, we need something in writing and to pay the AFR interest on the amount.

What would be the implications if any come tax time for us or my parents? Do we even need to report it at all? We would have the loan documentation as backup if needed.

Thanks in advance for any advice.
If you have enough cash already for a 20% down payment, would having a bigger down payment (of whatever amount you are planning once your house sells) get you a better rate for your mortgage?

If not, then why not just get the mortgage for the 20% down, and then once you close on your old house, which sounds like just a very short time later, then pre-pay the additional amount you would have put down at the closing of your new house.
(Just make sure that the entire extra payment is applied to the principal, and none to interest, which is how it would have been with a higher down payment.)

That should avoid complications with family loans, which would have been for such a very short time anyway.

RM
This signature is a placebo. You are in the control group.

bloom2708
Posts: 4911
Joined: Wed Apr 02, 2014 2:08 pm
Location: Fargo, ND

Re: Short Term Loan / Bridge Loan from Family

Post by bloom2708 » Thu Apr 26, 2018 10:17 am

Avoid family loans. Go with 20% down and then pay down the mortgage when your house closes.

You can always ask/pay for a re-cast to lower the payment or switch to 15 year for faster payoff.
"We are not here to please, but to provoke thoughtfulness." --Unknown Boglehead

TheAncientOne
Posts: 140
Joined: Wed Jul 19, 2017 8:53 pm

Re: Short Term Loan / Bridge Loan from Family

Post by TheAncientOne » Thu Apr 26, 2018 10:22 am

I suspect the technical answer is that you should have some legal documentation that includes the appropriate short term interest rate. As a practical matter, as long as both you and the family member are comfortable with an informal loan, they give you the money which you repay a month or two later when the sale of your existing home closes. Our daughter and son in law bought a house in the Bay Area a couple of years ago and we advanced them the amount of the mortgage so they could make an all cash offer. No paperwork. Given that my Fidelity money market account was earning all of one basis point at the time, I estimate we lost something like $10 in foregone interest, which I guess constituted a gift to them.

clayr361
Posts: 26
Joined: Tue Aug 19, 2014 2:48 pm

Re: Short Term Loan / Bridge Loan from Family

Post by clayr361 » Thu Apr 26, 2018 10:37 am

ResearchMed wrote:
Thu Apr 26, 2018 10:15 am
clayr361 wrote:
Thu Apr 26, 2018 10:08 am
My family is moving soon and our house went under contract much sooner than expected. The deal is We are set to close on our home on May 29th. We planned to use the proceeds from that sell as more of a down payment on the new home. We have the %20 down payment for the new home in cash now but wanted to put even more, say %40 down to lower our monthly payments on the new house as it is a more expensive home. We plan to buy and close on a new house sooner than May 29th and have already been approved for the mortgage on a non contingent status.

Could I take a short term loan from family for maybe a month or even less to cover the time between closing on a new house and selling the old one? It will be for more $ than a yearly gift allowance would cover so we can go that route. From what I have read, we need something in writing and to pay the AFR interest on the amount.

What would be the implications if any come tax time for us or my parents? Do we even need to report it at all? We would have the loan documentation as backup if needed.

Thanks in advance for any advice.
If you have enough cash already for a 20% down payment, would having a bigger down payment (of whatever amount you are planning once your house sells) get you a better rate for your mortgage?

If not, then why not just get the mortgage for the 20% down, and then once you close on your old house, which sounds like just a very short time later, then pre-pay the additional amount you would have put down at the closing of your new house.
(Just make sure that the entire extra payment is applied to the principal, and none to interest, which is how it would have been with a higher down payment.)

That should avoid complications with family loans, which would have been for such a very short time anyway.

RM
It would not affect the loan rate whatsoever. The reason I want to put more down in the beginning is to lower the monthly payment. If I put it down on principle after the loan was granted then it would only allow me to pay it off sooner, rather than lower the payments.

clayr361
Posts: 26
Joined: Tue Aug 19, 2014 2:48 pm

Re: Short Term Loan / Bridge Loan from Family

Post by clayr361 » Thu Apr 26, 2018 10:42 am

bloom2708 wrote:
Thu Apr 26, 2018 10:17 am
Avoid family loans. Go with 20% down and then pay down the mortgage when your house closes.

You can always ask/pay for a re-cast to lower the payment or switch to 15 year for faster payoff.
Thanks for the info. I did not realize recast was even an option. From my quick research not all lenders will do a recast though. Do you have to do a refinance to switch to a 15 year?

ResearchMed
Posts: 7497
Joined: Fri Dec 26, 2008 11:25 pm

Re: Short Term Loan / Bridge Loan from Family

Post by ResearchMed » Thu Apr 26, 2018 10:47 am

Wait... you are first worried that you would have higher monthly payments if you started with a 20% down (and then paid a lump sum from the sale) rather than put more down at the start, and then... you are wanting a 15 year mortgage, which would *definitely* have higher payments?

You could always keep a 30 year mortgage, but make higher payments as you wished, but wouldn't be locked into those.
(The downside, usually, is a slightly higher interest rate.)
That would give you more flexibility over time.

RM
This signature is a placebo. You are in the control group.

clayr361
Posts: 26
Joined: Tue Aug 19, 2014 2:48 pm

Re: Short Term Loan / Bridge Loan from Family

Post by clayr361 » Thu Apr 26, 2018 10:51 am

ResearchMed wrote:
Thu Apr 26, 2018 10:47 am
Wait... you are first worried that you would have higher monthly payments if you started with a 20% down (and then paid a lump sum from the sale) rather than put more down at the start, and then... you are wanting a 15 year mortgage, which would *definitely* have higher payments?

You could always keep a 30 year mortgage, but make higher payments as you wished, but wouldn't be locked into those.
(The downside, usually, is a slightly higher interest rate.)
That would give you more flexibility over time.

RM
I never said I wanted a 15 year mortgage. Was just interested in the fact that you could change it after the fact as the post made it sound. I guess the only plus in going with a 15 year over a 30 is the lower rate, which would not change unless you refinanced.

mmmodem
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Joined: Thu May 20, 2010 1:22 pm

Re: Short Term Loan / Bridge Loan from Family

Post by mmmodem » Thu Apr 26, 2018 10:58 am

I can't say for the tax implications. My loan agent said any money you use for a down payment must be in your account for a minimum of two months. Shorter than that, the underwriter will need proof of where it was obtained. It can't be a loan since that adds to your debt to income ratio. Basically, if you use gifted money, the best course is to deposit the amount ASAP and buy a home after two months time. If not, it gets complicated with the need for notarized affidavits of gifts.

RickBoglehead
Posts: 1002
Joined: Wed Feb 14, 2018 9:10 am

Re: Short Term Loan / Bridge Loan from Family

Post by RickBoglehead » Thu Apr 26, 2018 11:06 am

When we bought our current home, we had a similar situation, except that we didn't have the down payment available due to timing on the sale of our prior home. We could have sold mutual funds to come up with the funds. We didn't have a HELOC on our prior home, and couldn't get one once we listed it for sale.

Instead, we borrowed money from my in-laws. I drafted a simple 1/2 page agreement, using the IRS-specified interest rate for family loans. We paid the loan back with the interest 4 months later. I created a 1099-INT for them, and my in-laws declared the interest income on their tax return (which I prepared for them each year anyway).

100% aboveboard and legal.

kaudrey
Posts: 961
Joined: Fri Nov 22, 2013 2:40 pm

Re: Short Term Loan / Bridge Loan from Family

Post by kaudrey » Thu Apr 26, 2018 11:29 am

RickBoglehead wrote:
Thu Apr 26, 2018 11:06 am
When we bought our current home, we had a similar situation, except that we didn't have the down payment available due to timing on the sale of our prior home. We could have sold mutual funds to come up with the funds. We didn't have a HELOC on our prior home, and couldn't get one once we listed it for sale.

Instead, we borrowed money from my in-laws. I drafted a simple 1/2 page agreement, using the IRS-specified interest rate for family loans. We paid the loan back with the interest 4 months later. I created a 1099-INT for them, and my in-laws declared the interest income on their tax return (which I prepared for them each year anyway).

100% aboveboard and legal.
My sister and brother-in-law did this with my parents about 10 years ago. It was fairly simple.

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