Yellowstone Financial, Inc.

A (Semi) Official Way to Borrow and Loan Money with Family

If you managed to avoid politics around the holiday table, conversation may have touched upon another family third rail: the financial health of you and your loved ones.   In most families, there are those who are in a stronger financial position than others.

Giving an outright gift (or receiving it) from family members is easy if the money is there.  Your spouse and you can give $14,000 each calendar year to practically anyone you want.  You can give much more than this with the proper tax forms.  You can receive as much money as family members (or anyone else!) are willing to give you.  But what do you do when we’re talking about the large sums involved in buying or using the equity of a home?

Family mortgage processors such as National Family Mortgage (nationalfamilymortgage.com) have sprung up in recent years to make intrafamily mortgage loans easier and official.  They add the documentation and loan servicing needed to formalize the loan from one family member to another.

Chasing down family members for late family mortgage payments becomes unnecessary (as long as there’s still the willingness and ability to pay!).  Consider these situations and how a family mortgage processor may help you.

Your dad has plenty of home equity, but doesn’t have enough cash flow to cover his expenses.  He’s not interested in the expense, complexity, or variable rate of a commercially available reverse mortgage line of credit.  You’d like to help him out, but you don’t have so much that you won’t need it later.  You may end up inheriting the funds eventually, but then how can you be sure that the money you have given your father will not just end up being partly inherited by your siblings?

A family reverse mortgage allows you to set up a secured line of credit funded by the relatives of a retired homeowner.  The firm generates state specific mortgage documents for the loan, records a proper lien on the house, and files annual tax forms reflecting the mortgage interest being paid.

Your father and you agree on an interest rate that’s at least as much as the applicable federal rate (currently 2.71 percent on loans longer than 9 years).   Payments to your father can be made monthly or on a flexible disbursement schedule while the family loan processor tracks it for you.  If you have siblings who also want to help, they can be included in the arrangement.

Another common circumstance is that you have a goal of owning your first home.  You’ve saved up a down payment but with recent price increases in Boulder County, it’s a challenge to find a property where you can put down enough to qualify for conventional financing.  Your parents would like to loan you the money, but they want to make sure there’s something formal in place.  You’d rather pay at least some of the interest to your parents rather than a bank.

A family loan processor will set up a promissory note and a mortgage, in which the property will serve as collateral for the loan between your parents and you.  This makes the interest deductible for you, just like a typical mortgage.  Instead of paying a bank or mortgage company every month, you pay your parents.  This can be set up as a first mortgage if your parents are prepared to loan you the entire amount or a second mortgage.

For most it makes sense to have monthly servicing on the account, which includes payment reminders and statements to the borrower including electronic payment processing.  Annual 1098 forms to the borrower needed to deduct the interest and 1099-INT forms to the lender are included.

While these services are not free, they tend to be much less than traditional mortgages or reverse mortgage lines of credit.  There is often peril in lending to family in that you can be unsure that you’ll receive prompt payment or that there will be relationship strings attached to the loan.  But with independent loan processing in the mix, you’ve at least introduced a third party that can help formalize the relationship and keep you from having to send monthly mortgage reminders to your children.   For more information see nationalfamilymortgage.com.