Home Loan from Parents

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Enganerd
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Home Loan from Parents

Post by Enganerd » Fri May 18, 2018 4:33 pm

TLDR: Can a home loan from financially secure parents to financially secure son/daughter be mutually beneficial? More specifics below.

My parents are retired with pension income that more than covers their living expenses. Their home is paid off. They have some amount with an Edwards Jones account (I have discussed the fees and structure with them and have suggested SP500 plus bond fund if they want to invest more). And from my understanding a significant amount in bank accounts. Because they have pensions, both currently are adjusted annually for cola, I believe they do not feel the need to risk this money in investments. I can’t say I disagree, especially because it is their money and they have “won the game.” They are decently healthy, never fitness or nutrition zealots but no real bad habits either, and entering their 7th decade.

My wife and I have significant savings (some in high yield accounts for a down payment the rest in retirement accounts or an after tax brokerage), a paid off home (inexpensive starter home) and are considering purchasing a new home as we are becoming more comfortable settling down in the area as our careers are now established. My parents offered to provide a home loan for us to use. The logic being they could earn better interest than they are receiving in bank accounts and we could get a lower rate than offered commercially. I am not sure if this is true or something people do. Would it be better for them to simply invest in bond funds or CD ladders (or other conservative investment vehicles) and for us to shop for a loan the traditional way? If we do receive a loan from them how complicated would it be for them to report income from the interest and for us to deduct interest payments in an itemized deduction? Are there some legal considerations we need to understand? We have a good relationship and cannot imagine how this arrangement could lead to family stress. Our networth is currently more than twice probably more than 3x’s what we would consider borrowing and our jobs are very secure. Loan amount would likely be approx. 1.5x our current gross income.

I have been hesitant to try and obtain a more complete understanding of their financial status. As a likely heir I am afraid that pursuing this information would have a negative perception. But I can see how actual dollar amounts: living expenses, pension and SS income, investment balances, cash balances would help determine whether the above suggestion is a better idea or not. I simply assume that because of their fiscally conservative nature that the loan amount would not have a significant impact on their comfort level to handle unexpected expenses, even high ones.

Gill
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Re: Home Loan from Parents

Post by Gill » Fri May 18, 2018 4:38 pm

In spite of all you have said, family loans are best avoided for the many reasons frequently discussed on this forum.
Gill
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Pajamas
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Re: Home Loan from Parents

Post by Pajamas » Fri May 18, 2018 4:43 pm

If they give you a lower-than-market rate, the difference is considered a gift. That might not be a problem as long as their estate won't owe inheritance taxes.

I don't think it would really benefit them unless the risk is ignored. Making a single loan even to a well-off relative is riskier than CDs or a bond fund. That doesn't mean it is high risk or that you shouldn't do it.

Do think about possible effects it could have on your relationship. Could be beneficial, could be negative, could be mixed.

You should also keep everything very formal, record the mortgage, etc. to ensure that you can deduct interest.

MathWizard
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Re: Home Loan from Parents

Post by MathWizard » Fri May 18, 2018 4:53 pm

It is possible in the case of a single child, who is the only heir of the couple, that
excess net worth could be used while living rather than wait until passing could
make sense in terms of lessening the impact of interest payments to banks.

I have considered intra-family loans in my case on both side of the equation, where
there are no single child families.

I had enough money to pay off my house, but kept it invested.
My MIL was looking for more interest, since she was getting next to nothing from savings.
Her age and risk aversion precluded the stock market

I could have had her loan the money to me to pay off my house, and pay her the payments.
However,
she may not have understood when I stopped paying because the loan was paid off, and
other less well-heeled members of her family may have seen his as the bank of Mom, where
they might not have been able to pay her back.

Both points made this not a good idea.

This would likely also be a bad idea with our boys. I think there would be fewer problems in
our case, but the amount of financial gain is minuscule compared to the potential risk to
family relationships.

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whodidntante
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Re: Home Loan from Parents

Post by whodidntante » Fri May 18, 2018 5:37 pm

If it's truly an equitable deal then it might be OK and might not end in resentment. I would pay a full market interest rate that you would almost certainly get from a lender who would actually loan you the money if you applied. Do they want to own a 15 year secured note at 4% (or whatever)? If not, forget the whole thing. Also, are you going to lose the deductibility of the interest if you go this route? There should also be agreed on consequences for default, like you have to sell the house if you fall behind 6 months, and actually do it.

boogiehead
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Re: Home Loan from Parents

Post by boogiehead » Fri May 18, 2018 5:53 pm

I had a similar situation a couple years ago and based on what you described (and assuming your parents are on the same wave length) I believe it could potentially work out. Just make sure you are keeping track of everything for tax purposes and you guys are following the guidelines published by IRS
https://apps.irs.gov/app/picklist/list/ ... Rates.html, best part is you don't have to deal with the banks :sharebeer

donall
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Re: Home Loan from Parents

Post by donall » Fri May 18, 2018 6:44 pm

This can work. This worked with three kids. Same loan rate as bank but (except for filing fee at county and drawing up contract) without closing fees. Auto deduct works like a charm.

123
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Re: Home Loan from Parents

Post by 123 » Fri May 18, 2018 6:55 pm

Sure this can work but there are a lot of pitfalls. Of course divorce or your death could change the family dynamics and cause your parents to have some resentment such as your spouse living in the house with a new boyfriend or husband and still being "stuck" with the loan. With advancing age your parents may feel more free to visit the house to see if it is being maintained properly to protect their investment, that can cause resentment.

As attractive as a loan between parent and child can be it can result in headaches on both sides. I think its better to keep family and business separate (be an adult, not a child).
The closest helping hand is at the end of your own arm.

whomever
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Re: Home Loan from Parents

Post by whomever » Fri May 18, 2018 8:36 pm

Can a home loan from financially secure parents to financially secure son/daughter be mutually beneficial?
It worked for us. At the time banks were charging 11% and CD's were paying 7% or something like that, and the IRS minimum split the difference at 8% or so, so doing that was a win-win.

We put about 50% down, and filed formal mortgage paperwork so everyone was protected (my parents if we defaulted, or my siblings if my parents died young, etc).

I can't say it's right for every, or even many, families, but it worked out fine for us. Keeping the extra interest in the family made a lot of sense to all of us.

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Ged
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Re: Home Loan from Parents

Post by Ged » Fri May 18, 2018 8:41 pm

One thing to consider in a situation like this is what would be the consequences of one or both parents requiring several years of expensive nursing care. Would your loan compromise their ability to pay for this, and what would the legal implications of such a loan vis-a-vis Medicaid be.

DarthSage
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Re: Home Loan from Parents

Post by DarthSage » Fri May 18, 2018 8:49 pm

I would recommend having a lawyer draw up the papers, just to make sure it's all aboveboard in the eyes of the IRS.

The other issue nobody's mentioned so far is, do you have siblings? Might this be a cause of future resentment from siblings down the line? Even assuming that you pay everything back, right on schedule, I could see a few scenarios where resentment could creep in:

(1) Five years from now, Little Sis wants the same deal. Parents don't have the assets to tap for her.

(2) Parents have the assets, but now interest rates have risen, so Sis doesn't get the good deal you got.

(3) Parents find that they need long-term assisted care down the line, and need to call in the loan or get help from their children.

(4) Despite having the means, parents don't fell comfortable doing a similar deal with Slacker Brother.

I'm sure there are more possibilities. Personally, I'd rather go with a bank loan, but that's mostly because the relative who could have funded such a thing would have been controlling and put conditions on it. If your parents choose to do this, they need to be clear to any siblings as to what they're doing and why. Siblings have the right to get their questions answered, too--like, what happens to the loan when the parents pass? What if YOU pass first? These questions can be dealt with, but everyone needs to be aware of what's going on, and feel like they're being treated fairly.

Nutmeg
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Re: Home Loan from Parents

Post by Nutmeg » Fri May 18, 2018 10:08 pm

whodidntante wrote:
Fri May 18, 2018 5:37 pm
Also, are you going to lose the deductibility of the interest if you go this route?
The mortgage interest paid by the borrower to the parents is still deductible to the same extent as mortgage interest paid to a bank would be. The interest received by the parents should be included in their income for tax purposes. The parents can choose to (but are not required to) submit a Form 1098, Mortgage Interest Statement, to the IRS and to the borrower every year. If the parents don’t choose to file the official form, they should still provide the borrower with the amount of mortgage interest received.
Last edited by Nutmeg on Sat May 19, 2018 12:31 am, edited 1 time in total.

2comma
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Re: Home Loan from Parents

Post by 2comma » Fri May 18, 2018 10:54 pm

whomever wrote:
Fri May 18, 2018 8:36 pm
Can a home loan from financially secure parents to financially secure son/daughter be mutually beneficial?
It worked for us. At the time banks were charging 11% and CD's were paying 7% or something like that, and the IRS minimum split the difference at 8% or so, so doing that was a win-win.

We put about 50% down, and filed formal mortgage paperwork so everyone was protected (my parents if we defaulted, or my siblings if my parents died young, etc).

I can't say it's right for every, or even many, families, but it worked out fine for us. Keeping the extra interest in the family made a lot of sense to all of us.
Worked for us too. Our landlord died and his beneficiaries offered us a great deal on the house. Not even considering buying but it was a big gift. I called my dad and he said ok but my wife talked to her dad who had more investments and it worked out good for him and good for us (better than his CD rates). We skipped any qualifying and mortgage fees. He had graduated from law school so he dictated the terms to a local lawyer who wrote up the agreement. Although we weren't the best of friends the financial agreement was never an issue and it felt, to me, just like a bank loan and legally it was. He did mention to me that if I should preceded his daughter that he would forgive the loan but if we divorced I'd still be on the hook - still better than a bank loan.
If I am stupid I will pay.

BigLaw Survivor
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Re: Home Loan from Parents

Post by BigLaw Survivor » Fri May 18, 2018 10:59 pm

Google "National Family Mortgage". I used them to help my daughter buy a house and they were great.

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Sandtrap
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Re: Home Loan from Parents

Post by Sandtrap » Fri May 18, 2018 11:12 pm

123 wrote:
Fri May 18, 2018 6:55 pm
Sure this can work but there are a lot of pitfalls. Of course divorce or your death could change the family dynamics and cause your parents to have some resentment such as your spouse living in the house with a new boyfriend or husband and still being "stuck" with the loan. With advancing age your parents may feel more free to visit the house to see if it is being maintained properly to protect their investment, that can cause resentment.

As attractive as a loan between parent and child can be it can result in headaches on both sides. I think its better to keep family and business separate (be an adult, not a child).
++++++ 1

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Sandtrap
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Re: Home Loan from Parents

Post by Sandtrap » Fri May 18, 2018 11:13 pm

Ged wrote:
Fri May 18, 2018 8:41 pm
One thing to consider in a situation like this is what would be the consequences of one or both parents requiring several years of expensive nursing care. Would your loan compromise their ability to pay for this, and what would the legal implications of such a loan vis-a-vis Medicaid be.
Good point.
The things that are most important can't be entered on a spreadsheet.
j

michaeljc70
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Re: Home Loan from Parents

Post by michaeljc70 » Sat May 19, 2018 12:33 pm

My great grandmother held my parents mortgage for its entire term (30 years, but extra payments shortened that). It worked out in that there were fewer fees and a better rate for my parents and a better rate for my great grandmother. They set it up at a local bank that kept track of everything (probably less possible now with few community banks left) for no fee (basically, it was depositing in a savings account and crossing a payment off the amortization schedule).

Of course, if something terrible happened and my parents couldn't pay the mortgage, that would have been a difficult situation. Luckily, she lived with her daughter and didn't' need the money to live off of, but imagine if she did and it was a matter of evicting a grandson or being evicted herself.

VaR
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Re: Home Loan from Parents

Post by VaR » Sat May 19, 2018 2:11 pm

Enganerd wrote:
Fri May 18, 2018 4:33 pm
TLDR: Can a home loan from financially secure parents to financially secure son/daughter be mutually beneficial? More specifics below
OP, are you an only child? Do you yourself have children?

BTW, I agree with the conventional wisdom which says to not get into business arrangements with one's family like this. That said, the idea of using National Family Mortgage does sound intriguing. I wonder how much they charge for servicing?

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Enganerd
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Re: Home Loan from Parents

Post by Enganerd » Mon May 21, 2018 9:22 pm

I appreciate the cautions regarding the risk vs reward ratio of this proposition. That conservative rational outlook is what I appreciate about bogleheads.
However, this risk seems small enough to me that I should at least attempt to quantify the rewards. The risks seem like they would only trail an even more negative unlikely event. For instance if I die and then people begin behaving out of character, unlikely, there could possibly be strained relations between my wife and parents. But the fact that I died would be more significant the strained relations or any possible harm from a loan of 200k going poorly.
The upside I figure the AFR, thanks for the link I did not know about AFR, is a better deal than I can obtain from a bank with less fees. Plus all the interest minus taxes stays within my family.
I do have a brother who we should consider. He is fairly financially aloof and would unlikely care much one way or the other. But we will definitely make sure he is aware and has no objections before moving forward.
We don't have children but most likely will have some in the next few years.
I did not know about “National Family Mortgage” so I have some research to do. My parents recently suggested it and I hadn’t heard about it so I thought I would post it here and see what people had to say. Thanks for the info everyone!

bayview
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Re: Home Loan from Parents

Post by bayview » Mon May 21, 2018 11:11 pm

If neither the borrowers nor lenders are doing this through financial desperation (meaning that things are done because of some sort of ongoing disaster and fall through in a most unpleasant way), I don’t think that the National Bank of Mom and Dad should be automatically discounted.

My former MIL (mother-in-love) financed both my former SIL’s and BIL’s homes via personal mortgages, and AFAIK, it worked out well all around, win-win. We are talking about grown-ups on all sides, and not a lot of drama/ rescuing/ guilting/ etc. YMMV.

From what I was told, they signed legal docs and paid a market rate (perhaps a favorable one :D ), making it IRS legal. The feeling was that if someone was going to get the interest income, it might as well have been my MIL, and eventually the estate, thus going back to the kids/ borrowers.

Again, this needs to be done by people who are capable of acting as responsible, ethical, moral grownups, but there are certainly potential benefits to all parties.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

khale
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Re: Home Loan from Parents

Post by khale » Mon May 21, 2018 11:15 pm

We used National Family Mortgage for paperwork 5 years ago; everything has worked out very well with no surprises. I think they charge more now. It's a small company but they do know the tax law on this, and the contract they supplied made sense.
With the right participants, this idea enables offspring to compete with cash in a tight local real estate market.

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Tamarind
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Re: Home Loan from Parents

Post by Tamarind » Tue May 22, 2018 6:05 am

Make sure you draw up proper documentation of the loan with an interest rate that meets the IRS requirements for intra-family loans, and clear rules for the term and payment frequency. Think about what collateral, if any, you should have for the loan.

I strongly advise against putting a parent on the deed. Speaking from experience, it made it a pain to unwind at the end of the loan.

I benefitted from a family loan of a down payment (only child removed the sibling fairness dynamic). Neither my parents nor I understood the tax rules at the time, and I was young enough to take my parents' incorrect guidance. This has led to some extra legal advice costs on the back end. It worked out fine and set me on the road to have a paid off home in just a few more years. But I can think of a few ways it could have ended in disaster.

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djpeteski
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Re: Home Loan from Parents

Post by djpeteski » Tue May 22, 2018 6:53 am

There is a small set of circumstances that this can work out:

You always pay your bill on time, but not really early
They are comfortable with the terms of the loans
There is no sibling jelousy
They live to the end of the term of the loan.


There is a large set of circumstances in which this can go bad. For that reason it is often best to just go through the bank. The sibling jealous could lead to a generational split which is something your parents, most likely, do not want. People who do not pay back loans look at those who do as if they received a "gift" from the underwriter. They are just wired differently.

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RickBoglehead
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Re: Home Loan from Parents

Post by RickBoglehead » Tue May 22, 2018 7:35 am

Tamarind wrote:
Tue May 22, 2018 6:05 am
Make sure you draw up proper documentation of the loan with an interest rate that meets the IRS requirements for intra-family loans, and clear rules for the term and payment frequency. Think about what collateral, if any, you should have for the loan.

I strongly advise against putting a parent on the deed. Speaking from experience, it made it a pain to unwind at the end of the loan.

I benefitted from a family loan of a down payment (only child removed the sibling fairness dynamic). Neither my parents nor I understood the tax rules at the time, and I was young enough to take my parents' incorrect guidance. This has led to some extra legal advice costs on the back end. It worked out fine and set me on the road to have a paid off home in just a few more years. But I can think of a few ways it could have ended in disaster.
This ^^^

I agree with concerns mentioned loaning money to family. As noted above, the IRS has requirements for family loans including minimal rates - Index of Applicable Federal Rates (AFR) Rulings. These rates are published monthly, and are below what you'd be charged for a mortgage by a bank.

When we moved the last time, we had a house for sale and a down payment due at closing, and had put our old house up for sale before thinking to open a home equity line of credit, which you won't get approved for when your house is for sale. Rather than sell investments, I drafted a short document for my in-laws, borrowed the funds from them, and repaid them 4 months later when we sold our house. They got above market interest on the amount, I got the funds I needed. They declared the interest income on their taxes, and all was well. But my wife was an only child, and this was a short term loan. I wouldn't touch a mortgage without a lawyer involved that clearly outlined the issues to all parties. And I wouldn't go near it without understanding your parents financial picture completely.
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smackboy1
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Re: Home Loan from Parents

Post by smackboy1 » Wed May 23, 2018 9:33 am

Enganerd wrote:
Mon May 21, 2018 9:22 pm
I appreciate the cautions regarding the risk vs reward ratio of this proposition.
The intra-family issues aside, make sure to understand the full legal consequences. Make sure everything is in writing and properly recorded just like a commercial mortgage and note.

- To avoid running afoul of IRS rules the lowest interest rate is the published AFR. Make sure to use the proper rate. Of course the rate can be higher than AFR but does not need to be market rate.
- To make things easier, the payments don't have to be monthly. They could annual or bi-annual, or whatever is convenient.
- Include a clause allowing for early prepayment without penalty. That way it is easy to just payoff your parents if it becomes necessary to get rid of the mortgage and note.
- Create an amortization schedule so both you and your parents can see the interest/principal balance for taxes.
- Make sure everything is done correctly so the mortgage interest is deductible. The interest is taxable income to your parents. Keep paper records like you would a commercial mortgage.
- The note is a liability to you and your wife, and an asset of your parents. It can pass to other parties. Make sure to understand and plan for unlikely situation like premature death, divorce, creditors, bankruptcy etc..
- It's possible for your parent's in their will to specifically bequest the mortgage note to you. When they die, you inherit your own debt and it disappears. Might be simpler than dividing it up between the heirs.
- Make sure the house is adequately insured.
- The parent's should not forgive the debt. The IRS considers forgiveness of debt taxable income of the debtor. If the parent's want to be even more generous, do it by tax free gifting in a separate transaction.
Disclaimer: nothing written here should be taken as legal advice, but I did stay at a Holiday Inn Express last night.

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Enganerd
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Re: Home Loan from Parents

Post by Enganerd » Mon Jun 10, 2019 7:46 pm

Bumping this thread. We discussed the details extensively and all of us (my parents my wife and I) all want to go ahead with an intra family loan. National Family Mortgage will help with the paperwork for $875. This seems unnecessarily high. From what I can tell what need is promissory note and a mortgage/deed tying the property to the loan as a form of collateral. There are templates online but I feel it might be better to see if an attorney will review or write our documents. I have no idea how to go about finding an appropriate attorney. I don't feel like these needs call for the best of the best but I also do not want to deal with someone who is simply going to do online research like myself. I guess I should just check online for ratings of local real estate lawyers and call and talk to some? In general is it a good idea to have an attorney present at closing of a home purchase?

We will have a home inspection and appraisal. Is there anything else we should look into to cover the bases since we will not be using a traditional lender? Thanks!

JGoneRiding
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Re: Home Loan from Parents

Post by JGoneRiding » Mon Jun 10, 2019 7:58 pm

Pajamas wrote:
Fri May 18, 2018 4:43 pm
If they give you a lower-than-market rate, the difference is considered a gift. That might not be a problem as long as their estate won't owe inheritance taxes.

That isn't exactly true. IRS has a base rate dependent on length of loan. It changes regularly so you need to look it up. Every time I have done so it is less (usually by about 1%) then the going 30 yr mortgage. This is the rate you need to charge to be in the right side of legal.

OP if both parties see strong benefit and agree to a contract it can be beneficial to both. Some.have found people where upset when they paid it off early! And others that they were constantly judged but if both parties are good and no weird relationship it could work well for all!

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Enganerd
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Re: Home Loan from Parents

Post by Enganerd » Tue Jun 11, 2019 5:48 am

smackboy1 wrote:
Wed May 23, 2018 9:33 am
Enganerd wrote:
Mon May 21, 2018 9:22 pm
I appreciate the cautions regarding the risk vs reward ratio of this proposition.
The intra-family issues aside, make sure to understand the full legal consequences. Make sure everything is in writing and properly recorded just like a commercial mortgage and note.

- To avoid running afoul of IRS rules the lowest interest rate is the published AFR. Make sure to use the proper rate. Of course the rate can be higher than AFR but does not need to be market rate.
- To make things easier, the payments don't have to be monthly. They could annual or bi-annual, or whatever is convenient.
- Include a clause allowing for early prepayment without penalty. That way it is easy to just payoff your parents if it becomes necessary to get rid of the mortgage and note.
- Create an amortization schedule so both you and your parents can see the interest/principal balance for taxes.
- Make sure everything is done correctly so the mortgage interest is deductible. The interest is taxable income to your parents. Keep paper records like you would a commercial mortgage.
- The note is a liability to you and your wife, and an asset of your parents. It can pass to other parties. Make sure to understand and plan for unlikely situation like premature death, divorce, creditors, bankruptcy etc..
- It's possible for your parent's in their will to specifically bequest the mortgage note to you. When they die, you inherit your own debt and it disappears. Might be simpler than dividing it up between the heirs.
- Make sure the house is adequately insured.
- The parent's should not forgive the debt. The IRS considers forgiveness of debt taxable income of the debtor. If the parent's want to be even more generous, do it by tax free gifting in a separate transaction.
Thanks for the bulleted tips. I agree with all of them. We will still probably do monthly payments (not too hard to write a amortization schedule with 12 payments vs 2). I just need to decide whether I need a lawyer for this and if so the best way to find one for good value.

White Oak
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Re: Home Loan from Parents

Post by White Oak » Tue Jun 11, 2019 6:31 am

We did this a few years ago without any problems. We used the appropriate AFR for the term of our loan, and I tracked the payments on a Google Spreadsheet that I shared with my parents. At the end of each year I added up the interest for the previous year and my parents and I reported that on our taxes. I thought a little about hiring a lawyer, but didn't do it to save the expense.

We paid off the loan early in 2 years, and there were no issues in that time. I'm not sure that I would have wanted to have the loan with them for 15 or 30 years. Obviously there is a lot more that could happen in that time.

I used online bill pay to send them the money each month. The only annoying thing was that my parents were a little slow to cash the checks, so I had to be careful to have enough money in the checking account to cover several months of payments. If I were doing it today, I would probably set up a Venmo or Zelle payment.

Silk McCue
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Re: Home Loan from Parents

Post by Silk McCue » Tue Jun 11, 2019 6:46 am

Enganerd wrote:
Mon Jun 10, 2019 7:46 pm
Bumping this thread. We discussed the details extensively and all of us (my parents my wife and I) all want to go ahead with an intra family loan. National Family Mortgage will help with the paperwork for $875. This seems unnecessarily high. From what I can tell what need is promissory note and a mortgage/deed tying the property to the loan as a form of collateral. There are templates online but I feel it might be better to see if an attorney will review or write our documents. I have no idea how to go about finding an appropriate attorney. I don't feel like these needs call for the best of the best but I also do not want to deal with someone who is simply going to do online research like myself. I guess I should just check online for ratings of local real estate lawyers and call and talk to some? In general is it a good idea to have an attorney present at closing of a home purchase?

We will have a home inspection and appraisal. Is there anything else we should look into to cover the bases since we will not be using a traditional lender? Thanks!
It is difficult for me to imagine that you will do better than $875 in hiring your own lawyer to do this. NFM is in the business and knows this like the back of their hands.

Cheers

MathMaven
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Re: Home Loan from Parents

Post by MathMaven » Tue Jun 11, 2019 6:52 am

I have been the lender for a private mortgage for my daughter twice. In each case, the title insurance company handled the closing. An attorney at the title insurance company prepared the mortgage documents and handled the recording of these. The mortgage documents were prepared at no charge to us, though I was prepared to pay a fee for this. (National Family Mortgage was too expensive, in my opinion.) "Servicing" is easy. I created an amortization schedule in Excel. (Bank rate also provides mortgage amortization schedules.) My daughter transfers the monthly payment from her account to mine each month.
In each case, I charged the minimum long term AFR (applicable federal rate). Reporting of interest for taxes (and deductions) is straightforward.

My daughter was regarded as a "cash" buyer each time. Closing costs were reduced as well. In the first instance, it enabled her to purchase her townhouse in a tight real estate market. Three years later, she was able to contract to build a new home (no qualification needed, just proof of private mortgage funds availability) while still living in her townhouse for the 8 months prior to construction completion and closing.
When her sibling purchased a house, I offered the same private mortgage. His new wife was not comfortable with this, so they obtained a bank mortgage.

My spouse and I consider this a win - win, though mostly it is a way for us to help our daughter when she is young and can really benefit from it. We could possibly earn more investing the funds elsewhere, but have no need for a higher return on these funds. There have been no issues with either of these private mortgages.

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peetsperk
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Re: Home Loan from Parents

Post by peetsperk » Tue Jun 11, 2019 12:02 pm

As long as they hold your mortgage, Thanksgiving dinner is not going to taste nearly as good.

Topic Author
Enganerd
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Re: Home Loan from Parents

Post by Enganerd » Tue Jun 11, 2019 7:32 pm

MathMaven wrote:
Tue Jun 11, 2019 6:52 am
I have been the lender for a private mortgage for my daughter twice. In each case, the title insurance company handled the closing. An attorney at the title insurance company prepared the mortgage documents and handled the recording of these. The mortgage documents were prepared at no charge to us, though I was prepared to pay a fee for this. (National Family Mortgage was too expensive, in my opinion.) "Servicing" is easy. I created an amortization schedule in Excel. (Bank rate also provides mortgage amortization schedules.) My daughter transfers the monthly payment from her account to mine each month.
In each case, I charged the minimum long term AFR (applicable federal rate). Reporting of interest for taxes (and deductions) is straightforward.

My daughter was regarded as a "cash" buyer each time. Closing costs were reduced as well. In the first instance, it enabled her to purchase her townhouse in a tight real estate market. Three years later, she was able to contract to build a new home (no qualification needed, just proof of private mortgage funds availability) while still living in her townhouse for the 8 months prior to construction completion and closing.
When her sibling purchased a house, I offered the same private mortgage. His new wife was not comfortable with this, so they obtained a bank mortgage.

My spouse and I consider this a win - win, though mostly it is a way for us to help our daughter when she is young and can really benefit from it. We could possibly earn more investing the funds elsewhere, but have no need for a higher return on these funds. There have been no issues with either of these private mortgages.
Sounds like a good win win and a very similar outlook my parents have. They have no need or desire to invest this cash and the interest rate we will pay them is better than they currently receive. The interest rate will also be better than we could get from a traditional lender plus we will have less closing fees.

So did the mortgage paper work provided by the title insurance company define the terms of the loan and tie the property to the loan as collateral. For instance if for some reason your daughter stopped making payments you would eventually take over as owner of the property? Did you pay taxes on the interest income and she was able to deduct interest payments in an itemized deduction?

A title company I talked to also said it would be treated like a cash purchase which kind of seemed off to me. I figured it would be a mortgage just like through a bank but with a private person?

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Enganerd
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Re: Home Loan from Parents

Post by Enganerd » Tue Jun 11, 2019 7:35 pm

White Oak wrote:
Tue Jun 11, 2019 6:31 am
We did this a few years ago without any problems. We used the appropriate AFR for the term of our loan, and I tracked the payments on a Google Spreadsheet that I shared with my parents. At the end of each year I added up the interest for the previous year and my parents and I reported that on our taxes. I thought a little about hiring a lawyer, but didn't do it to save the expense.

We paid off the loan early in 2 years, and there were no issues in that time. I'm not sure that I would have wanted to have the loan with them for 15 or 30 years. Obviously there is a lot more that could happen in that time.

I used online bill pay to send them the money each month. The only annoying thing was that my parents were a little slow to cash the checks, so I had to be careful to have enough money in the checking account to cover several months of payments. If I were doing it today, I would probably set up a Venmo or Zelle payment.

That is basically our plan as well. I assume bank statements showing the automatic bill pay your spreadsheet could be used to show interest income for your parents and interest payments from you for tax purposes?

MathMaven
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Re: Home Loan from Parents

Post by MathMaven » Tue Jun 11, 2019 9:31 pm

Enganerd wrote:
Tue Jun 11, 2019 7:32 pm
Sounds like a good win win and a very similar outlook my parents have. They have no need or desire to invest this cash and the interest rate we will pay them is better than they currently receive. The interest rate will also be better than we could get from a traditional lender plus we will have less closing fees.

So did the mortgage paper work provided by the title insurance company define the terms of the loan and tie the property to the loan as collateral. For instance if for some reason your daughter stopped making payments you would eventually take over as owner of the property? Did you pay taxes on the interest income and she was able to deduct interest payments in an itemized deduction?

A title company I talked to also said it would be treated like a cash purchase which kind of seemed off to me. I figured it would be a mortgage just like through a bank but with a private person?
[/quote]

Yes, the mortgage paper work was in accordance with state laws. It included defining mortgage terms and specifying the property address. It is up to the private lender to specify terms such as late penalty and whether or not to require property tax escrow.
You will need a lawyer or other qualified person to do this. The mortgage must also be officially recorded.

If my daughter stopped paying, I believe that I would have the right to foreclose (just like any other mortgage lender!).
However, the private mortgage affords greater flexibility if the borrower encounters financial difficulties. As the lender, I am free to accept a lower monthly payment (such as interest only) for a certain time period if necessary.

If your parents are older, I recommend a shorter mortgage term. The current mortgage I hold for my daughter is amortized over 10 years. (I wanted to minimize the interest she pays and the interest I must pay taxes on.)

Yes, I pay taxes on the interest income and my daughter can deduct interest if itemizing. There are specific instructions for listing private mortgage interest income when filing taxes.

The reason it is treated as a "cash purchase" is because the borrower does not have to meet qualifications and be approved for the mortgage by the lender. The lender has already approved the borrower by agreeing to the private mortgage. This saves time and closing costs as no bank approval is needed.

The title company I worked with did not have any problem writing the mortgage. Private mortgages are not that unusual.

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willthrill81
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Re: Home Loan from Parents

Post by willthrill81 » Tue Jun 11, 2019 10:05 pm

It's like playing with fire; it can be an effective tool, but you can be easily burned.

I would only borrow from family if I knew that I could repay the funds in short order, no more than two or three years.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

White Oak
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Re: Home Loan from Parents

Post by White Oak » Wed Jun 12, 2019 12:38 pm

Enganerd wrote:
Tue Jun 11, 2019 7:35 pm
I assume bank statements showing the automatic bill pay your spreadsheet could be used to show interest income for your parents and interest payments from you for tax purposes?
It is true that we have the bank statements as a backup, but we never needed them. I sent my parents the updated spreadsheet at tax time each year, and they gave it to their accountant. I think I recorded the check number and date of each payment in the spreadsheet.

The tax software I used has an option for "other mortgage interest" or something like that, and I put the yearly interest amount into that form. I think the form asked for the lender's name, and I filled in my dad's name.


As others have noted, being able to make a cash offer (at least not having a bank involved) can be an advantage when there are multiple offers.

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Enganerd
Posts: 81
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Re: Home Loan from Parents

Post by Enganerd » Wed Jun 12, 2019 4:33 pm

MathMaven wrote:
Tue Jun 11, 2019 9:31 pm
Enganerd wrote:
Tue Jun 11, 2019 7:32 pm
Sounds like a good win win and a very similar outlook my parents have. They have no need or desire to invest this cash and the interest rate we will pay them is better than they currently receive. The interest rate will also be better than we could get from a traditional lender plus we will have less closing fees.

So did the mortgage paper work provided by the title insurance company define the terms of the loan and tie the property to the loan as collateral. For instance if for some reason your daughter stopped making payments you would eventually take over as owner of the property? Did you pay taxes on the interest income and she was able to deduct interest payments in an itemized deduction?

A title company I talked to also said it would be treated like a cash purchase which kind of seemed off to me. I figured it would be a mortgage just like through a bank but with a private person?
Yes, the mortgage paper work was in accordance with state laws. It included defining mortgage terms and specifying the property address. It is up to the private lender to specify terms such as late penalty and whether or not to require property tax escrow.
You will need a lawyer or other qualified person to do this. The mortgage must also be officially recorded.

If my daughter stopped paying, I believe that I would have the right to foreclose (just like any other mortgage lender!).
However, the private mortgage affords greater flexibility if the borrower encounters financial difficulties. As the lender, I am free to accept a lower monthly payment (such as interest only) for a certain time period if necessary.

If your parents are older, I recommend a shorter mortgage term. The current mortgage I hold for my daughter is amortized over 10 years. (I wanted to minimize the interest she pays and the interest I must pay taxes on.)

Yes, I pay taxes on the interest income and my daughter can deduct interest if itemizing. There are specific instructions for listing private mortgage interest income when filing taxes.

The reason it is treated as a "cash purchase" is because the borrower does not have to meet qualifications and be approved for the mortgage by the lender. The lender has already approved the borrower by agreeing to the private mortgage. This saves time and closing costs as no bank approval is needed.

The title company I worked with did not have any problem writing the mortgage. Private mortgages are not that unusual.
[/quote]

Thanks for the info!

BuckyBadger
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Joined: Tue Nov 01, 2011 11:28 am

Re: Home Loan from Parents

Post by BuckyBadger » Wed Jun 12, 2019 5:10 pm

Like any family finance question it could go fine or be a disaster and only you know the personalities of the people involved.

My dad has provided competitively-priced loans for my brother for three houses and every car he's ever owned. The cars and homes have been modestly priced and my brother has had some hiccups in his financial past. My brother still also lives in our hometown where my parents still live whereas I've moved away.

I've always gotten bank mortgages but my houses have been more expensive and my credit is better than my brother's. I usually pay cash for cars.

This has never bothered me in the slightest but, but my family has always been more open about finances than most.

So it can work out fine - but no one but you can guess if it will.

My father also did something that I'm sure no one on this board would ever recommend. He consolidated my brother's wife's student loans. It's working out fine. No one is concerned.

Losing any or all of this money would suck for my parents, but it wouldn't ruin their lives so they choose to use their money now while they are alive to make the lives of their children a little easier.

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