Borrowing from relative for (part of) mortgage?

[yoopermom]

I know you all are shaking your heads "no,no,no" already, but hear me out...

DSF is 81, retired, well off, and thinks highly of us(he's been my DSF for 25 years, if that matters). He has close to 100K sitting in CDs earning "almost no interest" (his words, not mine).

We are putting in an offer on a house that would be 160K, of which we have 40K in cash for the downpayment, and would need to finance the rest. Bank has already approved us for a 30 yr 5% mortgage on 120K balance.

DSF REALLY wants to "loan" us his 100K and to have us only take the 20K from the bank. I can't see any good reason to do this, but thought maybe I'm missing something? He's retired military, and tough, so would have legal paperwork drawn up,interest paid on it, etc, it would definately NOT be an outright gift, even after his death (he has 8 kids of his own, and multiple grandkids, etc).

My guess would be that he honestly wants to help us be happy. DH and I would die before we would not make a payment (to him or to the bank, we've both always been very frugal). I still just think we're better off keeping it with the bank, but I hate to hurt his feelings.

Edited to add: he does have long term care insurance, so I don't think he'd need it for health reasons.

Any reason TO borrow from him instead?

TIA!
Terri

 

[Diegosmom]

So say he dies the week after you buy the house how would payments be worked out?. That would be my only issue. Now if 100,000 would be your part once he died I would say go for it (with proper paper work) but if this money would be his kids money (and maybe some yours) then I wont do it. As he is getting old and you never know. I would figure out how that would be handled.

 

[yoopermom]

Yeah, I wondered that, too, if we would then have to go and get a mortgage from the bank after all, to pay back the estate? Actually, unless he and DM died together, it would go to DM (and she's only 61, and would accept the ongoing payback agreement).

Terri

 

[Marionnette]

What does the bank think about standing behind your DSF as a creditor? You might not qualify for that $20K loan if you are taking a mortgage out with someone else.

 

[yoopermom]

The bank said no problem (I have no idea why?!?). That I thought to ask, at least! Small town, you know...

Terri

 

[smitch425]

I think it's nice of him to offer, but You never know what life can throw your way. He may live one more day or 20 more years. I would want to know what HIS children think of this deal. We aren't talking about a simple $500 loan we are talking MAJOR money here. I would not take the deal. Assuming you are not trying to buy a home that is outside of your means, I say finance it all through the bank. This way you can avoid any unanticipated life events. I mean, who's to say something won't happen to one of his children or grandchildren and he might NEED the money in an EMERGENCY. Getting a better deal on a house, IMHO, is not an emergency. Just my opinion though.

 

[cvjw]

My BIL and SIL took out loans from DH's parents to finance 4 houses (BIL is a builder) - they did this in the home sales heyday a few years back. BIL took the money, built the houses, and guess what? In about 5 years, only 1 of them has sold. Now, BIL and SIL are left with 4 houses that they can't sell, DH's parents have hundreds of thousands of dollars tied up that they may or may not get back, and it has caused hard feelings with the rest of the family. Moral of the story, you never know when things will change, and even best intentions sometimes have unforeseen consequences.

 

[Swimalie]

There are IRS rules as to how much a person can gift to another in their lifetime. $100,000 goes way over the amount! I believe it's around $12,000 per person per year so you can get $13,000 from him and your husband can get $13,000 from him. If he gives more than the annual allowed, there are gift taxes as well. Which one of you will pay them?

Here is more information http://www.irs.gov/businesses/small/article/0,,id=108139,00.html

 

[yoopermom]

Not a gift, but a loan. (We'd sure never take that much from him!)

We really have no desire to take it from him instead of the bank, but he's being so insistent, we just wonder why (aside from being a super kind guy). Just wanted to make sure we weren't missing out on some hidden advantage!

Thank you all for the opinions so far....

Terri

 

[jmartinez1895]

In some cases the IRS will look at it as a gift even tho it is a loan and that will in turn bump you into a much higher income bracket to be taxed on. IMHO I would tell he that you love that he is so willing to help, but that you want to have the loan from the bank to help build your credit and you would like him to hold on to that cash just in cases someone in the family has a major emergency such as job loss or health issues.

 

[Swimalie]

In some cases the IRS will look at it as a gift even tho it is a loan and that will in turn bump you into a much higher income bracket to be taxed on. IMHO I would tell he that you love that he is so willing to help, but that you want to have the loan from the bank to help build your credit and you would like him to hold on to that cash just in cases someone in the family has a major emergency such as job loss or health issues.

I agree. With a loan you may need to get a lawyer to draw up documents which will add to the cost. Plus, as stated above, the IRS might think of it as a gift and then you're looking at the gift tax and possible higher income bracket.

http://www.smartmoney.com/borrow/debt-strategies/Loans-Among-Family-Members-9654/?zone=intromessage

 

[Diegosmom]

Also you can write off the amount of interest you paid to a bank for your home interest but if it is a loan from someone else I am not sure you would be able to write that off.

 

[crisi]

There are IRS rules as to how much a person can gift to another in their lifetime. $100,000 goes way over the amount! I believe it's around $12,000 per person per year so you can get $13,000 from him and your husband can get $13,000 from him. If he gives more than the annual allowed, there are gift taxes as well. Which one of you will pay them?

Here is more information http://www.irs.gov/businesses/small/article/0,,id=108139,00.html

Kind of. This isn't a gift, its a loan. And he can use his unified credit http://www.irs.gov/publications/p950/ar02.html during his lifetime. Since its a loan, it doesn't matter.

I wouldn't do it though. It probably wouldn't cause bad feelings for him, but he isn't likely to be the person your payment matters most to. It will be your mother in law - but in reality, it will most likely be his kids at some point - who will likely be a lot more anxious to get their hands on money instead of an IOU.

 

[mom2val]

I

 

[a1tinkfans]

You seem to have the 20% down, so why get tangled into something you may not want to deal with later?
I stand by a cardinal rule, never borrow from family and friends, if youd like to keep them as family and friends

You would not be able to able to get the tax advantage since it is a personal loan versus a bank loan, but you'd need to look further into it I believe.

I think that IF you said you could not afford the 20% (which IMHO is when people should not even be buying a home, not your case ) or IF you were in need somehow, perhaps a fleeting thought, but seriously speaking, there can be a myriad of issues say 5 years down the road when he or his kids, want/need the loan paid up early etc etc...
why even consider this...
sounds like a DISaster waiting to Happen I say RUN.....

 

[Zhoen]

I'm guessing the advantage that he is seeing is that money in the bank really *IS* getting bad interest at the moment, and he can probably get a better interest rate from you than the bank while saving you a bit off what the bank would charge you... for example, if the bank will give him 1% while charging you 5%, he could charge you 4%, which would make him more money while saving you money...

BUT...

I have to agree with all the PPs. Money makes people act very badly at times, and if he should pass away before you can repay him (because, let's do the math... is he likely to live to 101 to collect on a 20 year loan or 111 for a 30 year loan???) there will be the heirs to consider.

So, like the others said, it would be a matter of talking to his children, but also making sure that he will not need that money in the near term.

Best wishes!

 

[dis-happy]

You should visit your accountant, but there's a bit of a plus on this from an IRS perspective. You do the loan and pay faithfully. If/when he passes away, the remainder of the loan can be "forgiven".

My concern would be that he needs that money at some point and it will all be tied up in your house.

 

[Mom2Ben02]

My gut says no. What if he passes away in 5 years, and your mom needs the money? Or, if they both were to pass, and you needed to pay it back? I can pretty much bet that rates in 5 years will not be 5%.

 

[PlutoPony]

How would this loan play into your credit rating? Is he prepared to give you a 1099 for your taxes? Is there a provision in the loan/will for how this loan would be handled by his survivors - is it callable upon death by any chance (not something I would want to be tied to). Would he report your on-time payment history to a credit reporting agency? If not, do you need this payment history to be part of your credit rating? I know you'd still be borrowing $20k from a bank and that would show up, but that's not a significant amount of money for a mortgage....

 

[seashoreCM]

It will not be treated as a gift by the IRS if you have formal paperwork including a mortgage (document recorded at the registry of deeds and burnable at the end of the 30 years) to go with the loan note, and also your relative the lender issues 1099 forms every year and enforces non-payment including via foreclosure. However he does not have to join a credit bureau for the purpose of sending them reports on you.

When the "personal" loan is used to purchase your home and secured by a mortgage on said home then the interest you pay is deductible as home mortgage interest.

It should not be callable upon his death.

Upon his death the loan, if not yet paid in full, is still in effect and his estate and then the heirs will receive the monthly payments.

I would suggest that he not do this unless he is in first position; you should pay closing costs so he can engage an attorney to ensure this. Although first position is normally established by which document is recorded first, his attorney should see to it that any other mortgage taken out at the same time specifically declares itself subordinate to his.

Correction: Interest recipients issue 1098 forms; interest payers issue 1099 forms.