Dec 8, 2010

Mortgage lending in family - The up and down side of it.

According to the NewYork TimesIn cases like Matt Rado, who is in the market for his first home is getting a loan not from a bank but from his retired parents. Mr Rado who is preapproved for a 30 year fixed mortgage at about 4.75 percent from a commercial lender, will get at least as favorable a rate from his parents along with lower closing costs. At the same time, his parents will get a higher rate of return than is offered by a traditional savings vehicle like a savings account.

With credit tight and interest rates at historic lows, such intrafamily loans can be a win-win for parents and children. “It’s an absolutely terrific time to make an intrafamily loan,” said Carol G. Kroch, head of wealth planning for Wilmington Trust. Rick Kahler, a financial adviser in Rapid City, S.D., said, the intrafamily loans are much riskier than other investments. With an intrafamily loan, parents are betting that their children and their children’s significant others will have the income to repay the loan. And even if the children have excellent credit scores now, their status could change drastically — much faster than a corporation’s — if a job loss or illness were to occur. To help lessen these risks, financial planners have specific recommendations about who should make and get such loans.

  • Most financial planners recommend that parents make such loans only to children who would receive a loan on their own from a commercial lender.A loan to a child unable to get a bank loan, planners say, is more likely to be a bad investment with a greater chance of default. In such circumstances, gifts are a better idea.
  • Intrafamily loans probably aren’t right for parents who “have a lot of opinions about the lifestyle of their children” because a loan could make them become overly critical of the grown child’s spending habits and potentially damage the parent-child relationship, said Lauren Locker, a certified financial planner at Locker Financial Services in Little Falls,
  • To avoid tax consequences, the parents will need to charge an interest rate for loans with a set term that is at least what the government’s applicable federal rates are at the time the loan is created.
  • To make sure the money is considered a loan and not a gift for tax purposes, experts also recommend that the loans be documented as formal promissory notes that state the terms of the loan, including repayments, the interest rates and what will happen if the loan is not repaid.
  • To get the loan documentation drawn up, lenders can consult with lawyers willing to do the work for a lump sum, or check out companies like National Family Mortgage, which will help create notes for intrafamily loans. For $599, National Family Mortgage, which focuses on intrafamily mortgages specifically, will help families structure a promissory note, including penalty terms, and will also file the loan with the appropriate government authority.
Privocorp processes loans. We do not originate loans.


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