How to structure a loan to a family member?
June 14, 2018 2:52 AM Subscribe
Hi AskMe, i have just become aware of an immediate need to loan money to a family member so that they do not have their house foreclosed on. Help?
This is a large house they have owned for decades and in which they have substantial equity. I would like to structure a loan to them with a minimal interest rate that is backed by the existing equity in the property. How do I go about doing this? I assume I need a lawyer to help me draw up documents? How do I find someone to help me? What else should I be thinking about here? Thanks.
This is a large house they have owned for decades and in which they have substantial equity. I would like to structure a loan to them with a minimal interest rate that is backed by the existing equity in the property. How do I go about doing this? I assume I need a lawyer to help me draw up documents? How do I find someone to help me? What else should I be thinking about here? Thanks.
This is a really bad idea. If you are going to give money to a rwlative then give it with no expectation of repayment. Otherwise drama ensues.
posted by TestamentToGrace at 4:51 AM on June 14, 2018 [28 favorites]
posted by TestamentToGrace at 4:51 AM on June 14, 2018 [28 favorites]
Yes, lawyer. Real estate lawyer, in your state. I'm not sure if it has to be in the form of a mortgage, but you're talking about a lien on the home. If you didn't want to be secured in the property you could reasonably do a form loan with a promissory note on your own, but this needs to be done right. It shouldn't take more than a handful of hours.
TestamentToGrace has a fair point, but you asked and the answer is "brief consultation with a lawyer."
posted by snuffleupagus at 4:54 AM on June 14, 2018 [1 favorite]
TestamentToGrace has a fair point, but you asked and the answer is "brief consultation with a lawyer."
posted by snuffleupagus at 4:54 AM on June 14, 2018 [1 favorite]
As far interest rates on intra-family loans, there are some potential tax implications with going too low. Here's an explainer.
posted by snuffleupagus at 4:57 AM on June 14, 2018 [5 favorites]
posted by snuffleupagus at 4:57 AM on June 14, 2018 [5 favorites]
In general, I believe that you need written agreements though not necessarily drawn up by a lawyer. In this case I would specifically get one drawn up by a lawyer because if they almost lost the house this year they might really lose it next year and if you have the mortgage you will be protected in that case - you will get your money back if the bank sells it.
The other thing that occurs to me is that they may not be accurate about how much equity they have in the house.
posted by shothotbot at 5:28 AM on June 14, 2018 [3 favorites]
The other thing that occurs to me is that they may not be accurate about how much equity they have in the house.
posted by shothotbot at 5:28 AM on June 14, 2018 [3 favorites]
I'd find a real estate lawyer and structure a mortgage, but also look into the tax implications. That said, I would also consider...
What else should I be thinking about here?
People usually pay their mortgage payments before just about any other bills.
If this family member cannot pay the mortgage, and something in their financial picture is not about to change radically (and there wasn't a one-time event like loss of wages due to an injury that's now over or something similar), all you are doing is delaying the loss of their home - not saving it. And at that point, you will be one of the creditors in the foreclosure, so you will have to deal with the condition of the house and the selling price and everything that it seems like you're trying not to have to deal with now, even with the equity in the house.
In fact, if there's equity in the house I'm not clear on why the homeowner can't access it...if a bank won't lend them the money they need, then the chances of you getting it back are really low, in my opinion. Unless the house goes into foreclosure...I hope you see what I'm getting at here.
I think you would be better served to help this family member sell the house and get into housing they can afford, and the equity properly invested.
Obviously this is all on very little information but I suspect you are thinking very short term here.
posted by warriorqueen at 6:51 AM on June 14, 2018 [16 favorites]
What else should I be thinking about here?
People usually pay their mortgage payments before just about any other bills.
If this family member cannot pay the mortgage, and something in their financial picture is not about to change radically (and there wasn't a one-time event like loss of wages due to an injury that's now over or something similar), all you are doing is delaying the loss of their home - not saving it. And at that point, you will be one of the creditors in the foreclosure, so you will have to deal with the condition of the house and the selling price and everything that it seems like you're trying not to have to deal with now, even with the equity in the house.
In fact, if there's equity in the house I'm not clear on why the homeowner can't access it...if a bank won't lend them the money they need, then the chances of you getting it back are really low, in my opinion. Unless the house goes into foreclosure...I hope you see what I'm getting at here.
I think you would be better served to help this family member sell the house and get into housing they can afford, and the equity properly invested.
Obviously this is all on very little information but I suspect you are thinking very short term here.
posted by warriorqueen at 6:51 AM on June 14, 2018 [16 favorites]
Here is the Golden Rule of "Loaning" Money to Friends and Family: If it's important that you continue having a good relationship with them, don't lend them any money you're not 100% comfortable simply giving to them. Because the chances are that they're not going to pay you back. If the chances were good, they wouldn't need the personal loan in the first place. If it's important to you that you get the money back (with/without interest), make peace with the high probability that getting that money will irreparably harm the relationship. Regardless, since this sounds like a substantial amount of money, nthing the recommendation that you spend a minor amount of money on professional legal advice.
posted by slkinsey at 6:59 AM on June 14, 2018 [4 favorites]
posted by slkinsey at 6:59 AM on June 14, 2018 [4 favorites]
Whoa, back up. If this family member has been living in the house for decades, why isn't it paid off? Have they been raiding the equity through a second mortgage or HELOC? Were they drawn into some scam? Did they take out a reverse mortgage and now can't make even the minimal payments on taxes and insurance required to stay current? Is there any equity actually left in the property?
I'm not of the school that says never lend money to family (though gifts are preferable if at all possible). However, I am of the school that says don't throw good money after bad. Until you know why this person is in foreclosure, you can't begin to guess whether loaning them this money will do any more than earn them a temporary reprieve...if not, you might as well put it into hiring them a good foreclosure attorney.
Otherwise, yes, you need an attorney for this kind of agreement. You don't want to mess up a lien. Especially in case the foreclosure happens anyway.
posted by praemunire at 8:09 AM on June 14, 2018
I'm not of the school that says never lend money to family (though gifts are preferable if at all possible). However, I am of the school that says don't throw good money after bad. Until you know why this person is in foreclosure, you can't begin to guess whether loaning them this money will do any more than earn them a temporary reprieve...if not, you might as well put it into hiring them a good foreclosure attorney.
Otherwise, yes, you need an attorney for this kind of agreement. You don't want to mess up a lien. Especially in case the foreclosure happens anyway.
posted by praemunire at 8:09 AM on June 14, 2018
I am a lawyer (not yours and not a real estate one), and just a few months ago I used a firm to help us do something pretty similar to this for a person related to my employer. Several years ago, I was also a "lender" to a family member to help them avoid a last-minute foreclosure. (Spoiler alert: they got foreclosed on 6 months later and the money was gone.)
On the legal side, we had three principal documents: (a) a contract that spelled out our deal, (b) a promissory note that created the loan (using the required interest rate as snuffleupagus highlighted), and (c) a mortgage interest in the house that backed up the loan amount. There were a few ancillary documents that the "seller" had to sign at closing, too.
Also on the legal side, we had a few challenges/costs: (a) in at least some states, you have to pay a big tax to record the mortgage (ours was several thousand dollars); (b) we used a title company and had to pay them a few thousand dollars, too; and (c) even with lawyers going flat out, it took a couple of weeks to do everything. (not to mention (d) the mortgage interest you get will be subordinate to the principal mortgage(s), which means that you are second in line (at best) if your family member fails to pay you, and (e) the foreclosure process itself is expensive and long if you plan to enforce your rights.)
On the interpersonal side, if your family member ceases to pay you back, would you really foreclose on them? Or is the idea that recording the mortgage interest would just make sure that any leftover money goes to you directly instead of your family member? If the latter, are you confident that there is sufficient equity to cover the existing mortgage(s) and yours?
None of this is to say that it can't be done, but having just been through a similar process the mortgage part is well more complicated than just a few hours of lawyer time.
posted by AgentRocket at 8:18 AM on June 14, 2018 [3 favorites]
On the legal side, we had three principal documents: (a) a contract that spelled out our deal, (b) a promissory note that created the loan (using the required interest rate as snuffleupagus highlighted), and (c) a mortgage interest in the house that backed up the loan amount. There were a few ancillary documents that the "seller" had to sign at closing, too.
Also on the legal side, we had a few challenges/costs: (a) in at least some states, you have to pay a big tax to record the mortgage (ours was several thousand dollars); (b) we used a title company and had to pay them a few thousand dollars, too; and (c) even with lawyers going flat out, it took a couple of weeks to do everything. (not to mention (d) the mortgage interest you get will be subordinate to the principal mortgage(s), which means that you are second in line (at best) if your family member fails to pay you, and (e) the foreclosure process itself is expensive and long if you plan to enforce your rights.)
On the interpersonal side, if your family member ceases to pay you back, would you really foreclose on them? Or is the idea that recording the mortgage interest would just make sure that any leftover money goes to you directly instead of your family member? If the latter, are you confident that there is sufficient equity to cover the existing mortgage(s) and yours?
None of this is to say that it can't be done, but having just been through a similar process the mortgage part is well more complicated than just a few hours of lawyer time.
posted by AgentRocket at 8:18 AM on June 14, 2018 [3 favorites]
It depends where you are. You need somebody to draw up the documents, get them signed and record them, ask a title/escrow company. Obviously this can get fraught but the mechanics are not that complex but it might cost more or less depending upon the state. In Oregon you never needed a lawyer, in NY you pretty much did. The basic concept is that when you borrow money secured by your house the lender has a claim on your house. If you have more than one lender than there is a hierarchy of claims. For instance if your relative bought their house with a loan from a bank A and then got a home equity loan from bank B Bank A has claim on all of the house, Bank B has to wait until Bank A has gotten all of their money, (including foreclosure expenses etc.,) before they get anything. If you lend money to your relative with the house as collateral the best position you will be in is the position of Bank B. There may already be a Bank B, there also already may be other liens (claims) against the property, (back taxes, so called mechanics liens, "hard money" lenders for example.) The liquidation of the house is not going to be for the price it would get on Zillow etc. it might seem to be an extremely unfair price. You don't get any say in the matter. If nobody bids enough to satisfy the debt owed Bank A, Bank A will "buy" it and cancel the debt and all other lenders are out of luck.
Depending upon the amounts of money/age of relatives etc. simply lending them the money and filing a lien might not be the best solution, the lien does not necessarily provide that much protection and is going to cost money to create and enforce, if you charge them interest you will have to pay tax on it. You might be money ahead if you just pay their mortgage for a year.
It sounds like you need to have financial advice that is more about them than yourself. Are these relatives elderly? Is this about housing or preservation of assets for the future? Is this a rough patch or a new status quo?
posted by Pembquist at 12:49 PM on June 14, 2018
Depending upon the amounts of money/age of relatives etc. simply lending them the money and filing a lien might not be the best solution, the lien does not necessarily provide that much protection and is going to cost money to create and enforce, if you charge them interest you will have to pay tax on it. You might be money ahead if you just pay their mortgage for a year.
It sounds like you need to have financial advice that is more about them than yourself. Are these relatives elderly? Is this about housing or preservation of assets for the future? Is this a rough patch or a new status quo?
posted by Pembquist at 12:49 PM on June 14, 2018
If you really need the money and or secured asset you might consider buying the house from them and renting back for example, Instead of loaning the money.
posted by TheAdamist at 1:39 PM on June 14, 2018 [2 favorites]
posted by TheAdamist at 1:39 PM on June 14, 2018 [2 favorites]
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posted by yclipse at 4:03 AM on June 14, 2018 [3 favorites]