Personal loan on a house

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Topic Author
Havertzian
Posts: 16
Joined: Thu Sep 03, 2020 5:56 pm

Personal loan on a house

Post by Havertzian »

I've read through many posts on this forum about intra-family loans when it comes to house purchases, but am now as confused as ever. Here's my specific situation:

My partner and I are first time home buyers in a VHCOL area. My parents want to give us an interest-only loan for $350k at 2% (yes we know about AFR - but the difference between 2% and 4.xx% is less than the reportable amount of gifting towards an individual each year).

Upon my parents' passing, the loan will be forgiven and this will become a part of my inheritance, as spelled out in their trust. Here's the breakdown, with an $750k house as an example:

Our downpayment: $300k
Parents personal loan: $350k
Bank loan: $100k

At first, we wanted my parents loan to be a second mortgage so the house could be collateral, which we quickly realized banks wouldn't go for. My parents then said a general personal loan from them would be fine with them, but now I'm realizing that banks will ask where the extra $350k came from and will ask if we owe money on it.

Is there any way to do what we want to do here? My parents are being very generous here and we obviously do not want to commit mortgage fraud. Them simply gifting the money is off the table. Thanks for any direction here.
terran
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Joined: Sat Jan 10, 2015 9:50 pm

Re: Personal loan on a house

Post by terran »

As I understand it your parents will have to pay income tax on the AFR based interest regardless of whether that's what you actually pay.

The bank will ask if the money from your parents is a gift or a loan and if it's a loan they may or may not give you a mortgage.
exodusNH
Posts: 11407
Joined: Wed Jan 06, 2021 7:21 pm

Re: Personal loan on a house

Post by exodusNH »

Havertzian wrote: Fri Oct 25, 2024 6:09 pm I've read through many posts on this forum about intra-family loans when it comes to house purchases, but am now as confused as ever. Here's my specific situation:

My partner and I are first time home buyers in a VHCOL area. My parents want to give us an interest-only loan for $350k at 2% (yes we know about AFR - but the difference between 2% and 4.xx% is less than the reportable amount of gifting towards an individual each year).

Upon my parents' passing, the loan will be forgiven and this will become a part of my inheritance, as spelled out in their trust. Here's the breakdown, with an $750k house as an example:

Our downpayment: $300k
Parents personal loan: $350k
Bank loan: $100k

At first, we wanted my parents loan to be a second mortgage so the house could be collateral, which we quickly realized banks wouldn't go for. My parents then said a general personal loan from them would be fine with them, but now I'm realizing that banks will ask where the extra $350k came from and will ask if we owe money on it.

Is there any way to do what we want to do here? My parents are being very generous here and we obviously do not want to commit mortgage fraud. Them simply gifting the money is off the table. Thanks for any direction here.
The AFR Isn't about the non-reportable gift limit.

It's about how much income your parents will need to report to the IRS. They will need to recognize the interest generated at the AFR as income, not at 2%. Whether they collect the interest from you is a separate issue.
Topic Author
Havertzian
Posts: 16
Joined: Thu Sep 03, 2020 5:56 pm

Re: Personal loan on a house

Post by Havertzian »

exodusNH wrote: Mon Oct 28, 2024 10:21 am
The AFR Isn't about the non-reportable gift limit.

It's about how much income your parents will need to report to the IRS. They will need to recognize the interest generated at the AFR as income, not at 2%. Whether they collect the interest from you is a separate issue.
Ok thanks for your reply. Let me see if I have this right. At 2% interest only, that's $6,996 per year. At the current AFR of 4.15%, that's $14,520. Are you saying they would have to report that AFR total amount as taxable income even though they only collected $6,996? I was thinking they just report the lower number, and then the difference ($7,524) falls under gifting but they don't have to report since it's under $18k. Is that right?
terran
Posts: 3344
Joined: Sat Jan 10, 2015 9:50 pm

Re: Personal loan on a house

Post by terran »

It would also be a gift to you (which is below the reportable limit, depending on what other gifts they give you), but that doesn't change the fact that it's taxable income.
fabdog
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Joined: Wed Jan 16, 2013 12:59 pm
Location: Williamsburg VA

Re: Personal loan on a house

Post by fabdog »

Are you saying they would have to report that AFR total amount as taxable income even though they only collected $6,996
Yes, and as noted, report the delta as gift tax.

Is there any possibility your parents would agree to lend you $450K? You aren't going to get a bank or mortgage company to lend you $100K with another loan of $350K on the house. Even if they call it a personal loan, the bank will still not go for that

then the house can be collateral for their loan, and the whole process will be much simpler. It may even give you an edge bidding on houses, as now you can make an offer without finance contingency

Mike
Normchad
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Re: Personal loan on a house

Post by Normchad »

I think your parents could just gift you the money now. Tax free to everybody. I believe they just need to,fill out an additional tax form documents the “big gift” so that amount can reduce the “tax free inheritance ceiling” when they pass.

And then when you do,your mortgage stuff, they might ask for a note from your parents indicating the 350K is a true gift, and does not need to be paid back. I imagine a mortgage company would like this better, than you having a mortgage and yet another loan to be paying on.

Would this be easier for everybody?
Topic Author
Havertzian
Posts: 16
Joined: Thu Sep 03, 2020 5:56 pm

Re: Personal loan on a house

Post by Havertzian »

Thanks for the suggestion. My parents do want to collect a little bit of interest which I am totally good with. So currently looking into a recast since source of funds isn't much of a concern with those.
Normchad wrote: Wed Oct 30, 2024 1:43 pm I think your parents could just gift you the money now. Tax free to everybody. I believe they just need to,fill out an additional tax form documents the “big gift” so that amount can reduce the “tax free inheritance ceiling” when they pass.

And then when you do,your mortgage stuff, they might ask for a note from your parents indicating the 350K is a true gift, and does not need to be paid back. I imagine a mortgage company would like this better, than you having a mortgage and yet another loan to be paying on.

Would this be easier for everybody?
Bikesy
Posts: 183
Joined: Fri May 15, 2020 7:16 am

Re: Personal loan on a house

Post by Bikesy »

Seems like the cleanest way to do it is make the loan at whatever the lowest rate allowable is and then have parents gift the difference annually. One nice thing is you keep the interest that would be paid to a bank inside the family. The bad thing is, well, family and money :happy
FoolMeOnce
Posts: 1532
Joined: Mon Apr 24, 2017 11:16 am

Re: Personal loan on a house

Post by FoolMeOnce »

Havertzian wrote: Mon Oct 28, 2024 10:53 am
exodusNH wrote: Mon Oct 28, 2024 10:21 am
The AFR Isn't about the non-reportable gift limit.

It's about how much income your parents will need to report to the IRS. They will need to recognize the interest generated at the AFR as income, not at 2%. Whether they collect the interest from you is a separate issue.
Ok thanks for your reply. Let me see if I have this right. At 2% interest only, that's $6,996 per year. At the current AFR of 4.15%, that's $14,520. Are you saying they would have to report that AFR total amount as taxable income even though they only collected $6,996? I was thinking they just report the lower number, and then the difference ($7,524) falls under gifting but they don't have to report since it's under $18k. Is that right?
Think of it as if you actually went through all the steps - you paid your parents the AFR, and then they gifted back to you the difference between the AFR and 2%. That is effectively what would be happening. Doing it more efficient by simply not collecting that gifted difference does not change their income - after all, it is not a gift unless it was their money to begin with.
exodusNH
Posts: 11407
Joined: Wed Jan 06, 2021 7:21 pm

Re: Personal loan on a house

Post by exodusNH »

Havertzian wrote: Mon Oct 28, 2024 10:53 am
exodusNH wrote: Mon Oct 28, 2024 10:21 am
The AFR Isn't about the non-reportable gift limit.

It's about how much income your parents will need to report to the IRS. They will need to recognize the interest generated at the AFR as income, not at 2%. Whether they collect the interest from you is a separate issue.
Ok thanks for your reply. Let me see if I have this right. At 2% interest only, that's $6,996 per year. At the current AFR of 4.15%, that's $14,520. Are you saying they would have to report that AFR total amount as taxable income even though they only collected $6,996? I was thinking they just report the lower number, and then the difference ($7,524) falls under gifting but they don't have to report since it's under $18k. Is that right?
They will add $14,520 to their taxable income, regardless of how much you pay them in interest.

The difference between what you pay and the AFR is a gift from them to you, though below the reporting limit. However, that doesn't mean it's not still considered income.
Topic Author
Havertzian
Posts: 16
Joined: Thu Sep 03, 2020 5:56 pm

Re: Personal loan on a house

Post by Havertzian »

Thank you, this now makes sense to me and I will make sure they are aware, if they weren't already.
FoolMeOnce wrote: Tue Nov 05, 2024 7:43 am
Havertzian wrote: Mon Oct 28, 2024 10:53 am

Ok thanks for your reply. Let me see if I have this right. At 2% interest only, that's $6,996 per year. At the current AFR of 4.15%, that's $14,520. Are you saying they would have to report that AFR total amount as taxable income even though they only collected $6,996? I was thinking they just report the lower number, and then the difference ($7,524) falls under gifting but they don't have to report since it's under $18k. Is that right?
Think of it as if you actually went through all the steps - you paid your parents the AFR, and then they gifted back to you the difference between the AFR and 2%. That is effectively what would be happening. Doing it more efficient by simply not collecting that gifted difference does not change their income - after all, it is not a gift unless it was their money to begin with.
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