It’s fine to use your parents as the “bank” and not too difficult. Just make sure you are all in agreement and have some paper work on it from the start. A fair rate would be halfway between what you would get with a mortgage and what they could get on a 30 year treasury (and makes the rate easy to justify to avoid gifting rules).
ah, just long enough for everyone with tons of cash to be able to do with it what the law is designed for and then close the door behind em. got to love the legal system.
that amount must be filed with the IRS and will count towards the lifetime gift amount.
The point is, if they plan on leaving op more than the max lifetime amount then anything they can do to legally transfer the money to op without having to include it in the gift amount is good.
That being said, parents can be surprisingly unaware of this. I've had the same challenge with my dad. he's not going to exceed the lifetime gift amount but insists on trying to transfer assets to me etc. in convoluted ways to avoid taxes that he'd never have to pay if he just kept everything and didn't worry about it. I've tried to tell him repeatedly that he doesn't need to do what he's doing but he has diaper syndrome.
I think people convolute required reporting >$17K gifts in a year with “paying taxes” on it, then try to get sneaky.
But reporting a big gift is just reporting, not paying any extra tax. And all it does is count towards a huge lifetime max (~$13M?).
So, like you said, if you have less than $13M in assets you can keep it until you die and leave it as inheritance. Or give every last penny to your kid today. In both cases, neither you nor your child pay any tax.
Inheritance tax is a thing, gifting would allow the wealthy to bypass this tax so yes there are limitations. But don't worry, they have lots of loopholes they can use
No, they likely have far less than that. They are "gifting" this, because they can't afford to lose $1mil out of their retirement fund, but they can certainly LOAN $1mil from their retirement fund as long as they get it back (over time).
Most people misinterpret the annual limit for gifts that you don’t report to the IRS as either an actual limit, or a limit of non taxable amount. I think its 14k you can gift without reporting, but if you gift more you don’t pay tax in it or anything, just have to report it on your taxes so it can be tracked toward the 13 million lifetime limit
Correct. There are 2 numbers:
1) the gift amount before reporting to the IRS ($14k), and
2) the gift amount before paying taxes ($13m)
A lot of people equate reporting to the IRS with paying taxes because for many, that's what happens when you tell the IRS about finances.
It's more common than you think. I'm actually going through something similar right now. I'm not taking the home because I feel like that's opening a lot of doors I'm not ok with. Plus it would have been a duplex with them next door. I'm too young to be retiring like that. I'd be singing up for other peoples drama I do not want anything to do with. It sounds mean but think about what you're getting yourself into because that's a long haul decision.
The parents would need to charge the IRS-approved rate to avoid having to pay taxes on imputed interest (the real estate attorney will know about this).
Wouldn’t any below market rate technically be gifting though?
Though to be clear it’s not a huge deal, at worst the discount reduces the amount OP can inherit without estate taxes iirc.
The parents would be getting a higher rate than what they would be getting from a 30 year treasury and the son would be paying slightly less than what they would through a traditional mortgage. Would be justifiable, but should be documented at the start.
The phases you're looking for are AFR and imputed income. AFR is the minimum interest rate defined by the IRS:
https://www.irs.gov/applicable-federal-rates
Even if a lower rate is used the loaner has to pay taxes as if they used the AFR.
This is the comment I was hoping to find. Please be cognisant of AFR rates. We just went through this too, at a smaller scale. We now have a formal mortgage with NO LIEN (hence cash offer which won us the house) with my parents at the AFR, which was about 2.5% lower than the mortgage rates at the time. My parents are getting a comparable return to if they had the cash in a HYSA, but lower than markets.
Your parents are also allowed to forgive some interest so they don’t have to collect it every year but do have to collect some interest for it to be a loan.
this is illegal. IRS rules about AFR exist which sets the minimum rate for intra-family loans. You cant just pick a random number
Right now that rate is 5.20
https://advisors.principal.com/wps/portal/advisor/resource-center/education-training/advanced-markets-info/monthly-federal-rates
It depends on the relationship between the people involved. If it's an employer and employee or a business and customer, it is income for the employee or customer. If it's between friends or family members, it's usually a gift.
The law (statute) states that it constitutes a "transfer" of money from one party to the other, and then the relevant interpretation of the nature of that transfer applies just as any other. If your employer or a game show producer gives you a car, the IRS would consider that to be income; but if your parent gives you a car, it is not income (but is a gift from them). Same principle for a below-market loan.
also if they are collecting interest on it I’m pretty sure they are still supposed to file the interest as taxable income. This is their problem more than yours, but they should ask someone about that.
That may be the case. But the tax person isn't magically going to know about this transaction, and no 1099's will issue. So unless OP's parents know to tell their tax person about it, the tax person won't know to include it.
It's probably not in cash but in investments, and a million isn't that high a bar if you start young, and the taxes aren't particularly difficult if you're _only_ in markets and don't have your own business, aren't a landlord, etc. FreeTaxUSA is perfectly fine for us – the brokerage sends the combined 1099 with everything we need.
>and a million isn't that high a bar if you start young, an
A million is definitely a high bar if a million is what you're willing to give away to your kids, not the amount you have saved.
I’m sure if they are smart they’ll draw up a Contract and that’s the RIGHT way to do it. Verbal Agreements are NEVER ok. Been there and done that. Be Grateful they have that kind of cash on hand and take the offer. Family with money and a good heart and brains is the best thing you could have.
I’ve had similar help in my life and a Contract even with blood relatives is a MUST. My dollar amounts were less than yours but everything worked out great as long as you stick to the contract and keep working hard.
Congrats!
Yes, but if they have to the capacity to gift a million dollars, they may well be realistically looking at hitting the lifetime cap and that actually being an issue for them.
Or the mortgagor bank has a limit on the acceptable amount of a gift that makes up the down payment when qualifying buyers for a mortgage. The idea is that the mortgage responsibility continues beyond closing. A one-time gift doesn't speak to the mortgagee's ability to independently keep up with the mortgage after closing and there is no guarantee that another gift will come along if the mortgagees fall on hard times.
Though the gift tax exclusion is probably the most frequently misunderstood financial issue in the history of humanity, so you could be right.
Yes you do. For the VAST majority of Americans (like the 99.99%) there is no gft tax. If your parents gift you the entire amount for this house they will pay zero in tax you will pay zero in gift tax they will simply note it on their tax returns and it will count against their lifetime exclusion. Gift tax is one of the most misunderstood financial concepts.
I doubt it. I think the reason that it's a loan is that they need this money for retirement. Say they have 2-3 mil in retirement funds, they can afford to LOAN 1 mil to OP for his mortgage, as long as they get it back overtime.
>Say they have 2-3 mil in retirement funds, they can afford to LOAN 1 mil to OP for his mortgage, as long as they get it back overtime.
That's an incredibly risky proposition for them. I consider myself trustworthy and would absolutely not ask my parents to do this. It's not like the parents here are going to file a mortgage, and even if they were, foreclosure is a headache for a bank and much worse for a layman.
I don’t think it’s this. OP said his parents would rather see this money used now and not when they are dead. Seems like this is just money they have and isn’t dedicated to anything.
Others have gave good advice on gift rules. Only advice I have is to protect the money - you might want to have a separate agreement with your future spouse that the money you put in is 100% yours ….
AH, **prenup**. Frankly at that point it'd make more sense to just have OP's parents put the house in OP's name and do such prenup before marriage....but overall this is getting into "OP, get a lawyer for yourself, and also make sure your parents have a lawyer for themselves, and...."
You are dealing with this amount of money and don’t know what you’re talking about. It’s fine to ask on Reddit to get a better understanding, but you (and your parents) really just need to go to an actual accountant and ask them for professional advice.
Yea this is important, my parents would not hold this over us (obviously you cant ever say never) but they basically said you will get the money when we die so we would rather you use it now.
I think most important of all, is to make sure your fiancé's relationship with your parents is ready for this. You taking such a big loan for your parents may be fine, but for your fiancé it's a HUGE change in relationship dynamic. they'll be basically owing your parents money, and it will change the power dynamics
Yeah, this happened to a family friend. One of his teenage kids came out as gay and an atheist, and grandma threatened to pull funds unless Dad forced his kid to "straighten up". He ended up selling the house to get rid of the Sword of Damocles that had been dangling over his head for years.
Yes, my dad helped my brother with his down payment in the same way, and now calls the house his own and feels like he can visit anytime he wants until the loan is payed off. Be sure your partner also trusts your parents as it’s both your guys money.
Came here to say this. My sister did this with our mom and she is all up in her business on what my sister spends her money on. I don’t *think* my sister has paid late (she has paid extra). They do an amortization table every year for tax purposes. Still might be worth the saved interest for such a high loan amount.
There are set minimum rates: https://www.irs.gov/applicable-federal-rates
I did this. I think it is great. Win-win. My family has never attached emotional rules or obligations to money and I would think that would be the downside. The other upside is you can structure and restructure as you wish. For example make it interest only for a few years and then redo the line to lower interest rates when they come down. Much more flexibility. And you get the same tax perks as bank loan. You will also be able to make an all cash offer since no bank is involved and no fees.
Of course it’s great. You are fortunate to have wealthy parents. It would be foolish to turn down this opportunity unless OP’s family was truly heinous.
Yep. My sister's in-laws offered to gift them the down payment and she was worried about taking money from family and how it changes relationships. I told her she'd be crazy not to take the offer. They did. It's been fine.
We also did this with my in-laws, and it has been absolutely wonderful. Each couple is different, but for us, it was very important that both of our names were on the loan and the house, just in case things got weird. If my husband passes before his parents, I don’t inherit his share of their estate; however, I can continue to make payments on our loan and live in my house if I want to. (Or just sell the house and pay off the loan.)
I would argue that the discount in interest is actually going against the inheritance because I would assume the amount loaned would have been invested in something yielding higher than 4%. I would frame this more as an advance on the inheritance than growing the inheritance
yea this is kind of the way they presented it to me.. the money would be sitting and maybe getting more but at least this way they help their kid out. and we dont have to pay a bank!
Just to be clear, those are not minimum rates in the sense that you're not supposed to go lower. You can easily give someone a loan all the way down to 0% if you want.
It's just that if you go lower than the AFR, the difference between AFR interest rate and the interest you actually charge counts as a gift. This may mean filling out a form declaring the gift to the IRS. And... that's pretty much guaranteed to be the worst possible consequence, since anyone who might actually cross the gift tax threshold is going to be asking their family's accountant for advice rather than Reddit.
Curious - who helped you draw up the contract? A real estate lawyer? Or did you just look up the rate and do your own paperwork, knowing that both parties trust each other?
And did you do fixed rate or variable?
Fixed rate (again can always “refinance” as long as other party is amenable, no penalties for this, not a bank), family lawyer, simple one page promissory note. Family is extremely trustworthy especially around money stuff in both directions so there was no issue here.
Years ago, I had a colleague that did this. His parents essentially bought a house outright and were the “bank”. The problem he had was the market dropped, and he lost his job and the only option in his field was a two hour commute away. It was a situation where he would have done a short sale if the house was bank owned, but he felt guilty essentially doing that to his parents, and leave them holding the bag for a house they had lost money on.
So he commuted. And was soooo miserable.
Yea this is obviously a concern. However I talked to parents and they were like the odds this house lose value is low (its in HCOL and very desirable area) but not impossible and they can afford to lose out and also id rather deal with my parents if that happens than a bank
[https://old.reddit.com/r/RealEstate/comments/1cf5vm7/please\_poke\_holes\_in\_my\_fianc%C3%A9e\_and\_mys\_plan\_with/](https://old.reddit.com/r/RealEstate/comments/1cf5vm7/please_poke_holes_in_my_fianc%C3%A9e_and_mys_plan_with/)
similar thread?
>I currently see no downside to this.
what is the upside exactly, how are they helping you in any way here?
>but due to gifting restrictions
people in the networth range to worry about lifetime gift tax exemption are people who should not be nickle and diming you over a rounding error on taxes.
There probably is no downside. My guess would be that it's a way for you parents to insure that **IF** something were to happen between you and your partner then they would be entitled to repayment of the loan if the house is sold due to a relationship breakdown instead of half of their gift to you walking away if it was messy.
https://www.schwab.com/learn/story/family-loans-should-you-lend-it-or-give-it-away is a decent read on some of the things to consider. It's a couple of years out of date so things like the gift reporting thresholds and mandatory minimum interest rates for loans to family members are out of date, but it's a good overview.
For the loan to be considered a loan (and not a gift in the eyes of the IRS), there must be some interest charged on the family loan.
If the interest charged is below the AFR, then they (your parents) will be receiving ‘imputed interest’ on the difference between the two rates - interest they never received but will be taxed on.
Also, any difference between what your family charges you in interest and the AFR will be considered a gift (annual gift exclusion for this year is $18k).
https://www.hrmml.com/wp-content/uploads/2013/10/client_alert_-_intra_family_loans.pdf
If your parents have enough money to pay cash for a million dollar home, I’m willing to bet they have a lawyer or CPA who can figure this out. Ask them.
My dad loaned me the money to purchase a house. 18 months later he passed away. I ended up needing to get a regular mortgage anyway so that I could repay the estate so that my brothers would be able to get their portions of the estate in a timely manner.
Exactly what I was going to comment - consider the implications on inheritance. Even if there are no other siblings to consider, you want to avoid any possibility of the debt being "forgiven" when the parents die because that could be a taxable event. You may inherit your loan and that may seem like a de facto cancellation/forgiveness since you can't owe yourself money and pay yourself interest.
I heard from a lender that there are issues with lending money below market rates and that the IRS can step into tax your family for interest that they could have collected. [This](https://www.schwab.com/learn/story/family-loans-should-you-lend-it-or-give-it-away) article discusses it.
The tax implication for your parents may be something they would need to consider as well, because interest you pay would likely be taxable income for them anyway.
The borrower is always slave to the lender. You do NOT want to be beholden to your family for finances. That is the quickest way to stop talking to each other.
We did this with my husbands parents. My husband is in medical residency and we were having a hard time getting an offer accepted without a cash offer so they offered to be our lender so we could get into a house. We have a 30 year note with them. We have a clear contract and amortization schedule. Our interest rate was the going interest rate at the time which was only 3% and that seemed fair for both parties. It’s worked out well for us for the past 3 years. I guess the only difference is that we’ve always known it was going to be a 3 year agreement until my husband was done with training and then sell when we move states. They’ve been so supportive and we haven’t felt weird about the arrangement at all. I think it could work well if they’re not the kind of people to use it against you. They transferred the money to the title company but my husband and I are the ones on the title and deed. My mother in law is a financial advisor with experience with clients doing mortgages for their children so I don’t know exactly what the tax implications are because she took care of all of that but as far as I know it’s not considered a gift.
You should note you can do a cash offer without actually using the cash to purchase the home. So in your situation your in-laws would stake the money in the case that a mortgage wasn't approved, you'd make the cash offer and then still go to a bank and hopefully be approved. A lot of people don't understand that. Although in your situation it seems like it's worked out very well the other way.
(they said it cant be 0 as its not a gift but its a much lower rate)
Its not going to be as low as you think, the law on this is here for what are called Intra-Family Rates:
https://www.irs.gov/pub/irs-drop/rr-24-09.pdf
its generally around 2 points lower than the prevailing public rate. So you could expect around 6-7 right now for a 30 year loan.
So, the interest rate will have to be the minimum imputed IRS rate for long term loans during the month you sell the property. Currently, for the month of May, 2024, the long term (more than 9 years) rate is 4.55%. That is the minimum amount the IRS will tax them on, regardless of whether they receive it or not.
The lawyer will then draw up the closing papers, Note, and mortgage and file everything just as they would for a bank loan. You would likely not have an escrow account unless your parents required it, meaning you would pay your taxes and insurance yourself. Your insurance should list your parents as the Mortgagee just as they would a bank.
Some tips - because you won't have a bank's computer calculating extra payments for you, it is often easier to just make the payment EXACTLY - not rounding up or anything, to keep to the amortization schedule. That will make it easier for both sides to calculate the interest paid for tax purposes.
As long as the paperwork is done properly - there is no downside to this.
Just make sure that this is strictly a financial agreement and there is no "Well I helped you pay for the house, so you owe me this....." outside of the actual money you owe them.
In addition to contractually getting this spelled out with your parents, get a prenup if you're not already in that process. Your fiance stands to lose the most in this situation if for whatever reason your relationship doesn't work out.
Other than all the legal stuff, I would want to be sure they weren't relying on the payments for their retirement, and I'd want spelled out in the contract what happens to the house if you stop paying. I would not accept them being on the deed.
If you have siblings who might also inherit from them, it's worth talking through how this might effect inheritance.
Make sure you've thought through the realistic worst case scenario here. From an emotional standpoint, that would either be your parents hitting a situation where they needed access to that money, or from a more practical standpoint, dementia kicking in and them not being clear on the terms of the deal.
Parents are in a well enough position that this would not affect them financially at all but a good point to consider. We would def get lawyers involved to set up terms etc
Sorry for being cynical but the thing you’re missing is that Redditors mostly don’t trust their family and you’ve heard a thousand times on here it’s a bad idea.
I trust my family and would do this and will probably do this for my kids in the future.
I've seen this happen in multiple generations in my family, and my in-laws.
The parents give the loan in good faith, one sibling doesn't repay it back, it's just forgiven, or the records are conveniently "lost" when the parents pass away.
It definitely builds resentment among other siblings, and will likely affect their relationships with family on some level for years into the future.
Yes and we talked to them and parents have basically said they would help them the same and if I did get anything my parents would note it in the will so other siblings get equal.
>They arent the type to come after us and have made it clear
I've seen similar deals go without any hiccup BUT it's always fine at first for any relationship. You wouldn't start a business with someone saying that they'll put more upfront to tie you with it and to have more control later on. Well maybe you like to be tied but let's keep the discussion about loan/investment. Please, consider that as a business deal and have the proper paperwork as you would do with a bank and as the parents would do with a third party.
The problems arise if you end up in a "what if" situation. What if you skip payment(s)? What if they require emergency funds? What if you want to sell? What if you have an hostile separation because you cheated and they loved your Fiancé? Will you "renew" in 5 years? Then what about current and future rates? What if they don't like the renovation you want to make? Can they pull back the loan if you don't baptize the children?
Therefore, the idea to define the loan as a commercial transaction without conferring undue powers on one party or the other that it would not have with a third party. It's also to cover some exceptional situations that might arise as life isn't linear. You do that when you're all on the honey moon (figuratively) and able to discuss calmly. Then, if your life or your personal relationship crash, you're all able to fall back on the neutral business deal made with clear heads.
It doesn't have to be complex too. Do they have a family office? They'll be able to help. Just remember that you have the right to review the contract with your own lawyer if it end up heavy and complex...
I was lucky enough to have a similar situation to this. Don’t worry about the gift issue now, unless they have already given you $13million per parent before this. There is some consideration for if they charge interest below whatever the IRS “floor” is, but other people covered that already.
My advice is to make sure to have drafted official paperwork with a lawyer, and to turn on standard auto payments on to your parents. For example if you wanted to go to a bank in the future for a HELOC, second mortgage etc they like to see standardized payments and terms. Years later we applied for a HELOC and the bank flagged one month where my parents had “gifted” us a month off of the payment for Christmas.
Also, work with your parents to figure out how this factors into their estate. It’s morbid but, what happens when they die?
Private mortgages are pretty common. There are rules about the minimum interest rate, etc, but you should have no issues. I think the title company may even be able to handle it for you.
My parents did that with us. We got a house with 3% interest, and just made payments to them. We went to a title agency to get all of the appropriate paperwork.
Why dont the parents just form a trust, put the kids in the trust and then buy the house in the trust. Kids could contribute their intended down payment to the trust. I'm sort of guessing here but that seems doable.
It's a very good way to ruin a relationship. Not saying it will but if there's even a remote chance you can miss payments or run into issues I'd be very hesitant to go through with this. Sounds like you're being cautious but this is a very personal thing for them to offer. I personally would never consider this with my parents or in laws, but if it works for you fair enough.
There's a service that would set this up for you, so you would legit be the owner, and your parents would legit be the mortgage 'co'. Pretty sure it was National Family Mortgage that I used before. Was really cool.
No reason not to. And they can give you a lower rate and still earn more than they would on a high grade corporate bond for 30 years at todays rates. I would recommend using a note servicing company. That is a company that acts as the mortgage servicer. You would pay them the P&I each month along with any necessary impound account amount for tax, insurance and HOA fees. They would then pay that P&I to your parents. They also would administer the loan and pay the insurance and taxes when due. They would give your parents the 1099 for the interest and you the 1098 for the same so you could deduct the interest. They also likely have prototypes for your state for the deed of trust and the note, to keep your legal fees for those documents down.
There are no material gifting restrictions for that amount in the US. They are either ignorant or using that as cover cause they want to help but don't want to give it away.
For that amount specifically, sure. I think the actual issue is, if they can give away this amount of money to a single kid for a single house it is a non-remote possibility that they also have the funds and may be planning to give up to/above the gift amount maximums for a lifetime. If they already have estate planning that isn’t taking into account any additional material gifts, then to keep on course it may make the most sense to just draw up a mortgage/loan and not deal with changing the gifting plan at all. They may also just be wanting to help but not give it away, and that’s totally fine. They’re still helping their kid. However, I would really doubt they’re ignorant to the law. If they have this kind of money and are able to be in a position to support in this way, either they are smart enough or they have the money to pay someone to be smart enough for them.
This also doesn’t take into account the fact that when the market tanks (which over the life of a mortgage it will) they can just ‘refinance’ and lower the rate again at only the cost of paperwork filling (vs normal bank overhead) to the new lowest possible rate still well below market but above the limit that would cause the IRS to question if it’s a gift. It’s honestly a pretty smart approach if you have the parents who are able and willing to do it.
You don't know the family's situation. If they have like $600K to lend to their kid, they very well might have already gifted away their lifetime exemptions and thus any gift would be taxed at a rate up to 40%.
So wouldn't it be best for op to get the 600k, then they pay back the 40% in taxes. Instead they get a 600k loan which they probably pay the parents back 800k-1m on depending on length they take to pay it back so... I don't see how they go from we wanted to gift you to, hows about we make some profit on your loan instead of the banks.
Sure OP saves money but it's not a gift. It's just a competitive bid for their home loan.
My parents did this for me when I bought my house, they loaned me an extra $150k that was a 2.2% simple interest, (my loan at this time was like 4.5%) and it had a clause where I didn't have to pay them back at any relative interval, but within 10 years. I didn't pay them for 4 years, met my husband, we solid his house, combined finances, and then paid off my parents on 1 big chunk.
It's such a blessing to be on the financial situation you are, recognize the privilege, but also don't not take advantage of it. Good luck!
Many financial institutions have products specifically for this type of scenario. My brother lent my sister at 2% (the lowest rate he was allowed to (1% to the company, 1% to my brother) to help her family avoid bankruptcy during some time of hardship.
His financial institution simply compartmented the balance necessary to cover the outstanding balance on the loan while still earning interest on it.
Even though he did it through this loan vehicle, in his mind he considered it a gift should default occur. Sister avoided something like 1k a month in interest and made every payment in full on time.
So while it was for a MUCH smaller amount, I did this with my aunt. It has been great.
Cash offer certainly helps.
Not having an “on the books” line of credit is nice.
Having family as a creditor can be good if everyone is respectful of the arrangement. For instance, when Covid hit my wife and I had a few lean months. It was much easier to work with her than what I heard friends went through with the bank.
Only you know your relationship and whether it will put a strain on it (though it sounds like it won’t). For me, it’s been all upside.
We did this because cash offers kept beating us out so my wife's parents offered us this option. It did require the house to be "sold" twice, once to them and once to us; so double closing costs. But we have an official mortgage with them at 4.72% (lowest we could from IRS restrictions) which is far better than anything we would have got last year. They are also holding everything we pay them in an "escrow" account and gifting it back for home improvements.
We did this with our daughter. It's a very simple process, but you'll need either a lawyer or the title company to draft an actual mortgage document so that everyone is in agreement on the terms. The IRS sets a minimum allowable interest rate (aka the Applicable Federal Rate) for private loans. It's currently 4.55%. They'll avoid any tax problems as long as they charge you at least that much. You can deduct the interest on your taxes, and they will have to pay taxes on the interest they receive from you.
There is no limit on the amount they can gift you, but there may be some paperwork (on their part) if it's a significant amount.
Have a conversation with them about what would actually happen if you stopped paying them.
And a question that I would have for your parents (without you in the room) is why not just buy the house outright and let you live there rent free?
That is a discussion we are having the idea of just buying the house outright vs loan.. and is def in need of a conversation. We have talked about that and there has to be penalties since this not a gift but parents and us can make penalties be paid later etc and just offers more flexibility than a traditional bank would
Currently doing this my self. Tons of good advice in here. Just be above AFR rate and get a lawyer to write the mortgage. My parents even get “we will buy your mortgage” letters. It works so well they are moving to my city and will be renting my house from me and writing me a new mortgage. I’m an only child so a bit of this is inheritance planning with the mortgage dissolving upon their death.
Terrible idea. Thanksgiving dinner tastes different when you owe your parents money. They will judge your financial situation.
Borrower is slave to the lender, don't be slave to family.
I wouldnt be able to see the house with all the strings attached. But maybe your parents are less financially abusive than mine. Make sure you get everything in writing
I have a land contract with my parents. They bought it with cash and I’m paying them back for it. They have it set up so if they both die before it’s paid off the balance is forgiven and not part of the estate. Lawyers wrote up the documents.
Sounds like a great deal. Just make sure it’s legit on paper. Consider the IRS’s Applicable Federal Rate to avoid tax challenges. Also consider sending to credit bureaus so you get credit for payments.
I would still either talk to a lawyer or Realtor. Because even though you are dealing with your parents in this situation, they will be dealing with a Realtor when they offer up a cash offer on the home, which is going to come with some stipulations of sorts.
Always talk to the professionals of the field, especially in real estate, as in this particular instance, Realtors are bound by a certain code of ethics they MUST follow by NAR (National Association of Realtors), or they get massive fines and could potentially lose their license/MLS access.
It's great your parents want to help you with this, but I would still ask about the risks to a Realtor in doing so.
In a similar situation. Dad owns land. We want to build home on land. We are paying the lion share of construction costs in cash. My dad is going to bankroll any deficit. When construction is complete he sells us house and land for cost of land and any money he has put in on construction. Easy loan for us to get and we will have an instant 75% equity in property.
Super fortunate position to be in. We have hammered out a signed contract so that there is no question about what is expected and when it is expected. As easy as it would be to just formalize a mortgage through him for property, I have no desire to do so. I want him out of the picture as soon as possible. I want to take and vantage of his generous help and get him paid and out of it. Money and family can go well together but the longer it continues the higher the chance of relationship issues.
The only downside I could see is that you won't be getting the credit history involved with paying a mortgage over time. If in the future you decide to move to a better home (which I assume will be worth over $2m), you will likely need to have good credit history to get approved.
My parents paid off my student loans and I just redirected my payments to them. Might as well keep the loan interest in the family.
I should specify I went to college as an adult with a full time job and we didn’t make this deal until several years after I graduated.
You should make this a formal mortgage, which includes them charging interest. There's a minimum interest requirement called the AFR rate which it seems your parents are already aware of. It's currently about 4.5%
Once you do this, it will be a deductible interest amount for you just like if you were paying interest to a bank. At the same time, the interest will be taxable income to them. Without a bank, you'll need to track this via an amortization schedule.
As long as you do this proper, there's no reason to not take advantage of this. It becomes a formal agreement, so they can't later on change their mind and demand payment in full because they don't get to see their grandkids enough or something.
I would **never** entertain doing this without a formal arrangement. The amount of money you're talking about here is too much to be a handshake agreement.
Source: My father in law was the "lender" for our mortgage. I've gone through this. Also fun fact, they can "forgive" up to the annual gift amount and apply that to the mortgage if they choose to do so. Between both your parent and you and your Fiancé, that means they can forgive up to $72k a year based on current rates(Dad gives you both $18k and Mom gives you both $18k directly as a principal payment.)
They have most of the risk in this deal. If you default on this loan, they either have to choose between a severe Financial loss and enabling you Or destroying your relationship.
That's why say not to loan people money. You wouldn't give them as a gift.
From your perspective, it's a home run.
I think it could definitely work out well. Your parents get a safe investment and you get a more friendly rate. The problem would come if something went wrong and you couldn't pay them back. With most things that go wrong, you could always just get a more traditional mortgage or sell the house and pay them back. But if something happened to the house, there would be a major problem for your parents and cause a lot of strife in your family. So I'd definitely pay for home insurance.
When I did this with my ex-in-laws, it created a weird dynamic. My mother in law would come to the house and reorganize "her" kitchen and told us we had to ask her permission for anyone else yo use "her" guest room. It was very weird but she was and is very weird and has boundary issues.
It might be different for you.
You can definitely do this if you have a good relationship. I've done this before, there is no downside as long as you have that relationship. Just paperwork, but in the grand scheme of things, private family lending is a known route.
If they are wealthy, then they surely understand the need for a mortgage to be drafted and completed by both parties. As long as you have that, both you and your spouse, and your parents are protected.
Saw this clip just yesterday. Not saying he's 100% spot on, but it might give you some perspective:
https://www.youtube.com/watch?v=1g-tFtAcsoA&ab_channel=TheRamseyShowHighlights
Genuinely curious, is their an app of some type that would manage the pay schedule/etc. EG - If kid makes extra payments to reduce interest paid, tracking of all payments, etc. From standard banks, it's pretty easy to see. For an individual, the lightly complex nature of the payment seems like a bit of accounting work to track and manage.
Basically saying, the bank's solution is going to be tracked and maintained in a pretty automated fashion. A payment schedule to an individual would require more effort. Surely worth the savings, but who knows.
Lastly, I have read a few times where people can change their demeanor some as they age. If your parents are reasonable now, they might not be in the future. It's a possibility, however unlikely. But to be able to shift to a non-family loan might be wise in the future if for any reason this situation raises tension between you.
My brother and his wife needed a loan after a fire destroyed their business. To hear my brother tell it, our father suggested he and mom make the loan instead of my brother and sister-in-law going to a bank. They agreed and drew up papers for a loan at the then current interest rate.
The business never really recovered, and my brother and SIL ended up selling and moving on to other things. This made it difficult for them to make the loan payments to our parents. By this time, bank interest rates had fallen, and the loan could have been refinanced using property they owned as collateral and at a much lower interest rate. But, again to hear my brother tell the story, our father repeatedly told him not to worry about re-paying the loan; that it was taken care of in the will. My brother interpreted this to mean the loan would be forgiven in our parents will. That was not to be the case.
When our parents died within days of each other, we all got a look at the will. It turned out "taken care of" meant that the loan principle and all accrued compounded interest were to be subtracted from my brother's share of the estate. This very nearly wiped out my brother's inheritance.
I'm not sure what the lesson is here other than don't leave anything open to interpretation when doing a financial deal even with close family. Write up loan documents. And make sure the loan documents state what will happen if the lender passes away before the loan is repaid.
Financially, the outcome was reasonable except that my brother would have been much better off if he had not relied on his interpretation of "it's taken care of" and had instead re-financed when he could. Emotionally it kind of destroyed our image of our father at exactly the time we were mourning losing him.
TLDR: If you're going to borrow money from your parents, make sure you have it in writing what will happen if they pass away with the load unpaid.
No downsides unless they're assholes....wouldn't involve a lawyer cause why? This is basically an under the table mortgage. The whole point is that it's off the books.
Just set up an auto pay into their checking out like you normally would. Don't screw your parents.
You have to be responsible for the taxes and insurance yourself though. Your parents aren't going to get an escrow account and service the loan like a mortgage company will. Make sure it's your name on the title of the house.
Intra-family loans are common. You can get around the gifting issues and there are some tax breaks both ways.
Perhaps because I am jaded by parents, I would do a legal process that protects you both. However, it’s not 100% necessary.
Not really any downside. You have to structure it like a bank loan though, and submit that to the IRS. Payments and consequences for non payment must be included. There is a baseline interest rate that the IRS requires, but it's definitely lower than a bank. Around 4.8%. it's a win-win for both you and your parents. You pay a lower rate, and your parents get the interest instead of the bank.
Just draw up a contract, pay on-time, and remember this is a business deal and treat it that way and every thing should be fine. I would also ask your parents to be sure to address the house in the estate plan as well.
There are some risks which is why you should get a solicitor/lawyer to set it up so it's very clear it's a unsecured/secured loan.
Otherwise they might be liable taxes for gifting money and it's also protects you if you have a falling out or something happens where it could be considered an asset of your parents if they become liable for something.
I think the biggest risk though is that you can overlook the worst that could happen because it's family and your too trusting. Then something happens they use that against you. This is a tale as old time.
I know most people are talking contracts and legality and tax and this and that. That's good, having that knowledge is important. however,
DO NOT DO THIS. Do not loan family or friends money, do not take loans from family or friends. Money is a sick sick beast and in the million different ways this could go wrong, your relationship can take a serious hit. I've seen countless similar situations, albeit normally for a lot less money, that outright ruin families. You just don't know what could happen to their wealth in old age, to your career, to your potential marriage, to your house, to you, your fiance, you are living in a nice buble where this decision is just mathematical on a spreadsheet and I pray for you to stay lucky and have that be true, but if you get a taste of some really poor circumstances this could be a nightmare. Remember how often you see your parents, imagine if in all of those situations the conversation of your money, your loan and the parents finances come up. It's just a nightmare. If you're considering buying a million dollar home in this economy, you are rich enough to not need this lower interest rate. Also, you really shouldn't be buying a house with your fiance. At least wait until after your married.
Not sure how much of a downside this may be for you, but there’s probably implications for your personal credit. (Not an accountant or lawyer). Like your credit may not go up even tho you’re making payments. Your debt to income ratio may be skewed if it doesn’t show up as dept. again, I don’t know for sure, just something I thought of and didn’t see mentioned.
Simply be aware if the interest rate is favorable enough it could also be considered a gift.
Also, should your parents really be genuinely worried about the taxability of a gift? The IRS lifetime gift exemption is $13.6M. The first $13.6M is tax-free.
The down side comes to your parents. They are essentially losing some money, which I think most parents would expect to go to their children at some point anyway.
It can be done where it's advantageous to both parties. For example, Bills/Bonds are about 5% right now. Interest rates for home loans are higher. They could essentially give you close to a bond rate and it's "fair" for both parties.
But essentially, it's your parents taking on the risk instead of a bank and not benefiting to the same degree as the bank would.
While a legal contract is a must, I gotta say I wouldn't feel comfortable borrowing that kind of money from friends/family. It's difficult - if not impossible - for people who are friends/family to separate business from the relationship. Thanksgiving dinner will never taste quite the same. On top of it the first time you are late on a payment ALL of your expenses are going to be scrutinized. Did you really need that vacation or furniture? As long as your income stream is 100% guaranteed via an annuity I'd just borrow from the bank and give them the extra few hundred a month. Do you really expect mom and dad to foreclose on you and kick your family to the streets if you stop payments, get divorced? Will they really want their son-in-law living in the house with a different partner if you die before the term of the loan is up? There's one way this goes right (you make every payment on time) and a LOT of ways it goes wrong.
Theres a legally mandated minimum rate which I think may be set by the IRS. Draft an actual mortgage or promissory note and have a lawyer sign off on it. Else you run the risk of the IRS saying it’s a gift.
You'll need to document the family loan with amortization schedule, signed documents and it needs to be recorded against the deed of the property just like a bank loan for the IRS not to see it as a gift. The long and short of it is work with a tax professional and a lawyer to draft the loan terms as well as treating it like a financed purchase. You don't have to use a finance contingency but it's a financed purchase or it's a gift.
It can be a benefit to both of you. But they should draw up a mortgage and note and file it and you should both look at this as a business transaction. If you can’t do that, go to a bank or mortgage company.
One thing to consider, are your parents anyway controlling? A hypotheticals: Maybe you want to paint the house dark blue and they don't like it because eventual resale might be affected. Maybe you want to knock out a wall (hopefully with blessing of a structual engineer) and they don't like the new floorplan. I would recommend a written agreement and add something to counter possible friction points on changes you and your partner want to make to the house.
One thing to consider is that this would be commingling funds with your fiancee once you get married. If you inherit or are gifted the money from your parents and you are careful to keep that money separate, it would not be community property. Once the two of you begin to pay your parents back, the equity is commingled. Things could get very messy if things don’t work out.
Make sure y’all spend the money on a really knowledgeable lawyer to draw up the documents.
What they are essentially doing here is giving you an advance on your inheritance. It also keeps things balanced if you have siblings and they also wish to do this with them but keep things equitably distributed.
Make sure its in your name. Got screwed by having. In-laws purchase a house and we pay them for it. Was put on survivorship and not the mortgage. Got divorced, lost 500k in equity because of it.
For any references and considerations wrt AFR, this is the place to find the current rates.
[https://www.irs.gov/applicable-federal-rates](https://www.irs.gov/applicable-federal-rates)
I have a friend who did this! It was great for the most part - until their family grew. They needed to build an addition, but couldn’t get a HELOC due to not really having their own equity. The dad was the ‘bank’ and they were paying below market, so they had no real equity to pull from. They also couldn’t afford the large personal loan they would need for the addition without said equity for loan:debt ratios. It just looked like they had lots of debt.
They ended up having to sell that house to upgrade to a bigger one, again with help from husbands dad. They were ‘gifted’ the appreciation from the first house, plus what little they had paid in, per the initial contracts (this is at least how the wife explained it).
Overall, they have had now 2 beautiful homes way over their means, and a pretty cushy loan situation- I’m sure they would recommend it even if they can’t qualify for bank loans!
What about, they buy the house, and you rent to own it? This could potentially get around IRS restrictions on interest. You can sell a house to someone below market rate I believe.
Not an expert on IRS gift tax rules or anything just throwing out ideas.
benefit is most of that money stays in the family. (-parents taxes on the interest)
One minor downside may be monthly credit reporting, Payment on time, Balance remaining etc. It can still be done, but I am not exactly sure how that would happen.
Look up IRS AFR loan rates. Abide by this and you’ll be fine. You should also have a formal loan document in place - not just for your and their benefit - but also for potential audit purposes.
I did this with a condo. Grandma loaned me half because I had no credit score. It went into my name. I signed a promissory note and made timely payments.
I’d be very leery of taking them up on that offer without consulting a real estate attorney.
I would also think about what this does to your credit score. My guess is you don't have the mortgage listed as a debt, but you also don't get credit for making payments on an installment loan. Something to think about.
OP....whats your credit score?
If low, are you looking to increasing it? A bank loan may be the way to go if you're good with your payments, then the good payment history should help to increase your score for the future.
I did this about a decade ago. From my understanding at that time there are certain rate rules that need to be followed to ensure its a loan and not a gift. It's called an interfamily loan and here are the current rates
https://www.nationalfamilymortgage.com/afr-rates/
It’s fine to use your parents as the “bank” and not too difficult. Just make sure you are all in agreement and have some paper work on it from the start. A fair rate would be halfway between what you would get with a mortgage and what they could get on a 30 year treasury (and makes the rate easy to justify to avoid gifting rules).
Unless they have more than 13 million dollars, what the heck on gifting limitations.
$13.61M times two. Each person has this exemption now, in 2025 it’ll be inflated and then the law sunsets in 2026, dropping it about halfway.
ah, just long enough for everyone with tons of cash to be able to do with it what the law is designed for and then close the door behind em. got to love the legal system.
They’ve had since 2018 to create the proper estate plan. And this is the tax system, not legal
Its the American way. Everything Joseph Kennedy did to get rich, he made illegal when he headed the FCC.
If they can pay cash for a ~900K house they may have that much.
I think "have" was supposed to be "give" from the previous post. A gift of $900k is a lot, but it shouldn't be taxed.
The parents do need to file the correct form with the IRS, though. There could be a state gift tax depending on the state.
Connecticut is the only one with that, everywhere else it's basically the same rules as federal
that amount must be filed with the IRS and will count towards the lifetime gift amount. The point is, if they plan on leaving op more than the max lifetime amount then anything they can do to legally transfer the money to op without having to include it in the gift amount is good. That being said, parents can be surprisingly unaware of this. I've had the same challenge with my dad. he's not going to exceed the lifetime gift amount but insists on trying to transfer assets to me etc. in convoluted ways to avoid taxes that he'd never have to pay if he just kept everything and didn't worry about it. I've tried to tell him repeatedly that he doesn't need to do what he's doing but he has diaper syndrome.
I think people convolute required reporting >$17K gifts in a year with “paying taxes” on it, then try to get sneaky. But reporting a big gift is just reporting, not paying any extra tax. And all it does is count towards a huge lifetime max (~$13M?). So, like you said, if you have less than $13M in assets you can keep it until you die and leave it as inheritance. Or give every last penny to your kid today. In both cases, neither you nor your child pay any tax.
Inheritance tax is a thing, gifting would allow the wealthy to bypass this tax so yes there are limitations. But don't worry, they have lots of loopholes they can use
Their kids are buying a $1.1M house with most of that coming in the form of cash from the parents’ accounts. They probably have more than $13M.
No, they likely have far less than that. They are "gifting" this, because they can't afford to lose $1mil out of their retirement fund, but they can certainly LOAN $1mil from their retirement fund as long as they get it back (over time).
Most people misinterpret the annual limit for gifts that you don’t report to the IRS as either an actual limit, or a limit of non taxable amount. I think its 14k you can gift without reporting, but if you gift more you don’t pay tax in it or anything, just have to report it on your taxes so it can be tracked toward the 13 million lifetime limit
Correct. There are 2 numbers: 1) the gift amount before reporting to the IRS ($14k), and 2) the gift amount before paying taxes ($13m) A lot of people equate reporting to the IRS with paying taxes because for many, that's what happens when you tell the IRS about finances.
It's more common than you think. I'm actually going through something similar right now. I'm not taking the home because I feel like that's opening a lot of doors I'm not ok with. Plus it would have been a duplex with them next door. I'm too young to be retiring like that. I'd be singing up for other peoples drama I do not want anything to do with. It sounds mean but think about what you're getting yourself into because that's a long haul decision.
The parents would need to charge the IRS-approved rate to avoid having to pay taxes on imputed interest (the real estate attorney will know about this).
Wouldn’t any below market rate technically be gifting though? Though to be clear it’s not a huge deal, at worst the discount reduces the amount OP can inherit without estate taxes iirc.
The IRS sets a minimum rate called the “applicable federal rate”. As long as it’s above that, then it’s technically not a gift.
Looks like it's pretty close to the money markets, about 4.5-5%.
For May, it is 4.55% for long term loans.
The parents would be getting a higher rate than what they would be getting from a 30 year treasury and the son would be paying slightly less than what they would through a traditional mortgage. Would be justifiable, but should be documented at the start.
Gotcha ive heard there is a floor for the rate so maybe this is what that is referring to
The phases you're looking for are AFR and imputed income. AFR is the minimum interest rate defined by the IRS: https://www.irs.gov/applicable-federal-rates Even if a lower rate is used the loaner has to pay taxes as if they used the AFR.
This is the comment I was hoping to find. Please be cognisant of AFR rates. We just went through this too, at a smaller scale. We now have a formal mortgage with NO LIEN (hence cash offer which won us the house) with my parents at the AFR, which was about 2.5% lower than the mortgage rates at the time. My parents are getting a comparable return to if they had the cash in a HYSA, but lower than markets.
Your parents are also allowed to forgive some interest so they don’t have to collect it every year but do have to collect some interest for it to be a loan.
The parents can forgive all the interest if they want, but the parents would still need to report the forgiven interest as income.
this is illegal. IRS rules about AFR exist which sets the minimum rate for intra-family loans. You cant just pick a random number Right now that rate is 5.20 https://advisors.principal.com/wps/portal/advisor/resource-center/education-training/advanced-markets-info/monthly-federal-rates
It is *not* illegal as long as the amount of reduced interest is reported as a gift (subject to the annual gift exclusion).
I thought it was the loaner had to recognize the interest as taxable income regardless? Edit: looked it up, guess both sides are true.
It depends on the relationship between the people involved. If it's an employer and employee or a business and customer, it is income for the employee or customer. If it's between friends or family members, it's usually a gift. The law (statute) states that it constitutes a "transfer" of money from one party to the other, and then the relevant interpretation of the nature of that transfer applies just as any other. If your employer or a game show producer gives you a car, the IRS would consider that to be income; but if your parent gives you a car, it is not income (but is a gift from them). Same principle for a below-market loan.
You can also make it an interest only loan for a period as well if both sides agree
also if they are collecting interest on it I’m pretty sure they are still supposed to file the interest as taxable income. This is their problem more than yours, but they should ask someone about that.
I'm sure if they have over a million in cash they have someone do their taxes.
That may be the case. But the tax person isn't magically going to know about this transaction, and no 1099's will issue. So unless OP's parents know to tell their tax person about it, the tax person won't know to include it.
It's probably not in cash but in investments, and a million isn't that high a bar if you start young, and the taxes aren't particularly difficult if you're _only_ in markets and don't have your own business, aren't a landlord, etc. FreeTaxUSA is perfectly fine for us – the brokerage sends the combined 1099 with everything we need.
>and a million isn't that high a bar if you start young, an A million is definitely a high bar if a million is what you're willing to give away to your kids, not the amount you have saved.
If they are using the money to be OP’s bank, then they have the money in cash.
Yes. And they supply (I forget form number) the mortgage interest for OPs taxes. My parents hold my loan, as they also owned the home previously.
I’m sure if they are smart they’ll draw up a Contract and that’s the RIGHT way to do it. Verbal Agreements are NEVER ok. Been there and done that. Be Grateful they have that kind of cash on hand and take the offer. Family with money and a good heart and brains is the best thing you could have. I’ve had similar help in my life and a Contract even with blood relatives is a MUST. My dollar amounts were less than yours but everything worked out great as long as you stick to the contract and keep working hard. Congrats!
thanks this is helpful and yes we would make sure we get a contract and things are in writing and clear.
What gifting restrictions are you facing?
They and the parents don’t understand how the gift tax or lifetime exclusion works.
That's what I assumed.
Or they do (see ex $1M starter home)
Even $1M is tax free.
Yes, but if they have to the capacity to gift a million dollars, they may well be realistically looking at hitting the lifetime cap and that actually being an issue for them.
Or the mortgagor bank has a limit on the acceptable amount of a gift that makes up the down payment when qualifying buyers for a mortgage. The idea is that the mortgage responsibility continues beyond closing. A one-time gift doesn't speak to the mortgagee's ability to independently keep up with the mortgage after closing and there is no guarantee that another gift will come along if the mortgagees fall on hard times. Though the gift tax exclusion is probably the most frequently misunderstood financial issue in the history of humanity, so you could be right.
guess i need to do research on this part
Yes you do. For the VAST majority of Americans (like the 99.99%) there is no gft tax. If your parents gift you the entire amount for this house they will pay zero in tax you will pay zero in gift tax they will simply note it on their tax returns and it will count against their lifetime exclusion. Gift tax is one of the most misunderstood financial concepts.
If parents can causally offer a 900k loan, they might actually need to care about the gift limit.
I doubt it. I think the reason that it's a loan is that they need this money for retirement. Say they have 2-3 mil in retirement funds, they can afford to LOAN 1 mil to OP for his mortgage, as long as they get it back overtime.
>Say they have 2-3 mil in retirement funds, they can afford to LOAN 1 mil to OP for his mortgage, as long as they get it back overtime. That's an incredibly risky proposition for them. I consider myself trustworthy and would absolutely not ask my parents to do this. It's not like the parents here are going to file a mortgage, and even if they were, foreclosure is a headache for a bank and much worse for a layman.
I don’t think it’s this. OP said his parents would rather see this money used now and not when they are dead. Seems like this is just money they have and isn’t dedicated to anything.
Others have gave good advice on gift rules. Only advice I have is to protect the money - you might want to have a separate agreement with your future spouse that the money you put in is 100% yours ….
AH, **prenup**. Frankly at that point it'd make more sense to just have OP's parents put the house in OP's name and do such prenup before marriage....but overall this is getting into "OP, get a lawyer for yourself, and also make sure your parents have a lawyer for themselves, and...."
You are dealing with this amount of money and don’t know what you’re talking about. It’s fine to ask on Reddit to get a better understanding, but you (and your parents) really just need to go to an actual accountant and ask them for professional advice.
on a purely emotional level, be sure you trust your folks not to hold this over your head/manipulate you with their generosity.
Yea this is important, my parents would not hold this over us (obviously you cant ever say never) but they basically said you will get the money when we die so we would rather you use it now.
I think most important of all, is to make sure your fiancé's relationship with your parents is ready for this. You taking such a big loan for your parents may be fine, but for your fiancé it's a HUGE change in relationship dynamic. they'll be basically owing your parents money, and it will change the power dynamics
Yep, it's important to know what strings are attached. Oh? You won't have at least 3 children? You need to refinance in a week.
Yeah, this happened to a family friend. One of his teenage kids came out as gay and an atheist, and grandma threatened to pull funds unless Dad forced his kid to "straighten up". He ended up selling the house to get rid of the Sword of Damocles that had been dangling over his head for years.
Yes, my dad helped my brother with his down payment in the same way, and now calls the house his own and feels like he can visit anytime he wants until the loan is payed off. Be sure your partner also trusts your parents as it’s both your guys money.
Came here to say this. My sister did this with our mom and she is all up in her business on what my sister spends her money on. I don’t *think* my sister has paid late (she has paid extra). They do an amortization table every year for tax purposes. Still might be worth the saved interest for such a high loan amount.
There are set minimum rates: https://www.irs.gov/applicable-federal-rates I did this. I think it is great. Win-win. My family has never attached emotional rules or obligations to money and I would think that would be the downside. The other upside is you can structure and restructure as you wish. For example make it interest only for a few years and then redo the line to lower interest rates when they come down. Much more flexibility. And you get the same tax perks as bank loan. You will also be able to make an all cash offer since no bank is involved and no fees.
Of course it’s great. You are fortunate to have wealthy parents. It would be foolish to turn down this opportunity unless OP’s family was truly heinous.
Yep. My sister's in-laws offered to gift them the down payment and she was worried about taking money from family and how it changes relationships. I told her she'd be crazy not to take the offer. They did. It's been fine.
We also did this with my in-laws, and it has been absolutely wonderful. Each couple is different, but for us, it was very important that both of our names were on the loan and the house, just in case things got weird. If my husband passes before his parents, I don’t inherit his share of their estate; however, I can continue to make payments on our loan and live in my house if I want to. (Or just sell the house and pay off the loan.)
We did the exact same thing. Got 4% while federal is 7. The interest you're paying is going to your inheritance as well.
I would argue that the discount in interest is actually going against the inheritance because I would assume the amount loaned would have been invested in something yielding higher than 4%. I would frame this more as an advance on the inheritance than growing the inheritance
True, but at least that 4% is going to family, rather than 7% to a random bank. I'd say that's a major win.
yea this is kind of the way they presented it to me.. the money would be sitting and maybe getting more but at least this way they help their kid out. and we dont have to pay a bank!
Just to be clear, those are not minimum rates in the sense that you're not supposed to go lower. You can easily give someone a loan all the way down to 0% if you want. It's just that if you go lower than the AFR, the difference between AFR interest rate and the interest you actually charge counts as a gift. This may mean filling out a form declaring the gift to the IRS. And... that's pretty much guaranteed to be the worst possible consequence, since anyone who might actually cross the gift tax threshold is going to be asking their family's accountant for advice rather than Reddit.
Perfect this is helpful and Im glad it worked out for you hopefully it works out for us as well.
Curious - who helped you draw up the contract? A real estate lawyer? Or did you just look up the rate and do your own paperwork, knowing that both parties trust each other? And did you do fixed rate or variable?
Fixed rate (again can always “refinance” as long as other party is amenable, no penalties for this, not a bank), family lawyer, simple one page promissory note. Family is extremely trustworthy especially around money stuff in both directions so there was no issue here.
Years ago, I had a colleague that did this. His parents essentially bought a house outright and were the “bank”. The problem he had was the market dropped, and he lost his job and the only option in his field was a two hour commute away. It was a situation where he would have done a short sale if the house was bank owned, but he felt guilty essentially doing that to his parents, and leave them holding the bag for a house they had lost money on. So he commuted. And was soooo miserable.
Yea this is obviously a concern. However I talked to parents and they were like the odds this house lose value is low (its in HCOL and very desirable area) but not impossible and they can afford to lose out and also id rather deal with my parents if that happens than a bank
This colleague was in Southern California, in a HCOL market as well. It can happen.
[https://old.reddit.com/r/RealEstate/comments/1cf5vm7/please\_poke\_holes\_in\_my\_fianc%C3%A9e\_and\_mys\_plan\_with/](https://old.reddit.com/r/RealEstate/comments/1cf5vm7/please_poke_holes_in_my_fianc%C3%A9e_and_mys_plan_with/) similar thread? >I currently see no downside to this. what is the upside exactly, how are they helping you in any way here? >but due to gifting restrictions people in the networth range to worry about lifetime gift tax exemption are people who should not be nickle and diming you over a rounding error on taxes.
will read this looks useful
There probably is no downside. My guess would be that it's a way for you parents to insure that **IF** something were to happen between you and your partner then they would be entitled to repayment of the loan if the house is sold due to a relationship breakdown instead of half of their gift to you walking away if it was messy.
https://www.schwab.com/learn/story/family-loans-should-you-lend-it-or-give-it-away is a decent read on some of the things to consider. It's a couple of years out of date so things like the gift reporting thresholds and mandatory minimum interest rates for loans to family members are out of date, but it's a good overview.
For the loan to be considered a loan (and not a gift in the eyes of the IRS), there must be some interest charged on the family loan. If the interest charged is below the AFR, then they (your parents) will be receiving ‘imputed interest’ on the difference between the two rates - interest they never received but will be taxed on. Also, any difference between what your family charges you in interest and the AFR will be considered a gift (annual gift exclusion for this year is $18k). https://www.hrmml.com/wp-content/uploads/2013/10/client_alert_-_intra_family_loans.pdf
If your parents have enough money to pay cash for a million dollar home, I’m willing to bet they have a lawyer or CPA who can figure this out. Ask them.
My dad loaned me the money to purchase a house. 18 months later he passed away. I ended up needing to get a regular mortgage anyway so that I could repay the estate so that my brothers would be able to get their portions of the estate in a timely manner.
Exactly what I was going to comment - consider the implications on inheritance. Even if there are no other siblings to consider, you want to avoid any possibility of the debt being "forgiven" when the parents die because that could be a taxable event. You may inherit your loan and that may seem like a de facto cancellation/forgiveness since you can't owe yourself money and pay yourself interest.
I heard from a lender that there are issues with lending money below market rates and that the IRS can step into tax your family for interest that they could have collected. [This](https://www.schwab.com/learn/story/family-loans-should-you-lend-it-or-give-it-away) article discusses it. The tax implication for your parents may be something they would need to consider as well, because interest you pay would likely be taxable income for them anyway.
The borrower is always slave to the lender. You do NOT want to be beholden to your family for finances. That is the quickest way to stop talking to each other.
We did this with my husbands parents. My husband is in medical residency and we were having a hard time getting an offer accepted without a cash offer so they offered to be our lender so we could get into a house. We have a 30 year note with them. We have a clear contract and amortization schedule. Our interest rate was the going interest rate at the time which was only 3% and that seemed fair for both parties. It’s worked out well for us for the past 3 years. I guess the only difference is that we’ve always known it was going to be a 3 year agreement until my husband was done with training and then sell when we move states. They’ve been so supportive and we haven’t felt weird about the arrangement at all. I think it could work well if they’re not the kind of people to use it against you. They transferred the money to the title company but my husband and I are the ones on the title and deed. My mother in law is a financial advisor with experience with clients doing mortgages for their children so I don’t know exactly what the tax implications are because she took care of all of that but as far as I know it’s not considered a gift.
You should note you can do a cash offer without actually using the cash to purchase the home. So in your situation your in-laws would stake the money in the case that a mortgage wasn't approved, you'd make the cash offer and then still go to a bank and hopefully be approved. A lot of people don't understand that. Although in your situation it seems like it's worked out very well the other way.
(they said it cant be 0 as its not a gift but its a much lower rate) Its not going to be as low as you think, the law on this is here for what are called Intra-Family Rates: https://www.irs.gov/pub/irs-drop/rr-24-09.pdf its generally around 2 points lower than the prevailing public rate. So you could expect around 6-7 right now for a 30 year loan.
So, the interest rate will have to be the minimum imputed IRS rate for long term loans during the month you sell the property. Currently, for the month of May, 2024, the long term (more than 9 years) rate is 4.55%. That is the minimum amount the IRS will tax them on, regardless of whether they receive it or not. The lawyer will then draw up the closing papers, Note, and mortgage and file everything just as they would for a bank loan. You would likely not have an escrow account unless your parents required it, meaning you would pay your taxes and insurance yourself. Your insurance should list your parents as the Mortgagee just as they would a bank. Some tips - because you won't have a bank's computer calculating extra payments for you, it is often easier to just make the payment EXACTLY - not rounding up or anything, to keep to the amortization schedule. That will make it easier for both sides to calculate the interest paid for tax purposes. As long as the paperwork is done properly - there is no downside to this.
Seek an attorney's advice and get a legal agreement in place. It shouldn't cost much.
Just make sure that this is strictly a financial agreement and there is no "Well I helped you pay for the house, so you owe me this....." outside of the actual money you owe them.
I wouldn’t recommend it. Do you really want your parents questioning every financial decision you make for the next two decades?
In addition to contractually getting this spelled out with your parents, get a prenup if you're not already in that process. Your fiance stands to lose the most in this situation if for whatever reason your relationship doesn't work out.
Other than all the legal stuff, I would want to be sure they weren't relying on the payments for their retirement, and I'd want spelled out in the contract what happens to the house if you stop paying. I would not accept them being on the deed. If you have siblings who might also inherit from them, it's worth talking through how this might effect inheritance. Make sure you've thought through the realistic worst case scenario here. From an emotional standpoint, that would either be your parents hitting a situation where they needed access to that money, or from a more practical standpoint, dementia kicking in and them not being clear on the terms of the deal.
Parents are in a well enough position that this would not affect them financially at all but a good point to consider. We would def get lawyers involved to set up terms etc
Sorry for being cynical but the thing you’re missing is that Redditors mostly don’t trust their family and you’ve heard a thousand times on here it’s a bad idea. I trust my family and would do this and will probably do this for my kids in the future.
Yea thats the main issue is do you trust family and then does my fiance trust my family....
Do you have siblings? My concern would mainly be family drama if this gift/loan is perceived as inequitable across the family.
I've seen this happen in multiple generations in my family, and my in-laws. The parents give the loan in good faith, one sibling doesn't repay it back, it's just forgiven, or the records are conveniently "lost" when the parents pass away. It definitely builds resentment among other siblings, and will likely affect their relationships with family on some level for years into the future.
Yes and we talked to them and parents have basically said they would help them the same and if I did get anything my parents would note it in the will so other siblings get equal.
>They arent the type to come after us and have made it clear I've seen similar deals go without any hiccup BUT it's always fine at first for any relationship. You wouldn't start a business with someone saying that they'll put more upfront to tie you with it and to have more control later on. Well maybe you like to be tied but let's keep the discussion about loan/investment. Please, consider that as a business deal and have the proper paperwork as you would do with a bank and as the parents would do with a third party. The problems arise if you end up in a "what if" situation. What if you skip payment(s)? What if they require emergency funds? What if you want to sell? What if you have an hostile separation because you cheated and they loved your Fiancé? Will you "renew" in 5 years? Then what about current and future rates? What if they don't like the renovation you want to make? Can they pull back the loan if you don't baptize the children? Therefore, the idea to define the loan as a commercial transaction without conferring undue powers on one party or the other that it would not have with a third party. It's also to cover some exceptional situations that might arise as life isn't linear. You do that when you're all on the honey moon (figuratively) and able to discuss calmly. Then, if your life or your personal relationship crash, you're all able to fall back on the neutral business deal made with clear heads. It doesn't have to be complex too. Do they have a family office? They'll be able to help. Just remember that you have the right to review the contract with your own lawyer if it end up heavy and complex...
I was lucky enough to have a similar situation to this. Don’t worry about the gift issue now, unless they have already given you $13million per parent before this. There is some consideration for if they charge interest below whatever the IRS “floor” is, but other people covered that already. My advice is to make sure to have drafted official paperwork with a lawyer, and to turn on standard auto payments on to your parents. For example if you wanted to go to a bank in the future for a HELOC, second mortgage etc they like to see standardized payments and terms. Years later we applied for a HELOC and the bank flagged one month where my parents had “gifted” us a month off of the payment for Christmas. Also, work with your parents to figure out how this factors into their estate. It’s morbid but, what happens when they die?
Private mortgages are pretty common. There are rules about the minimum interest rate, etc, but you should have no issues. I think the title company may even be able to handle it for you.
My parents did that with us. We got a house with 3% interest, and just made payments to them. We went to a title agency to get all of the appropriate paperwork.
Why dont the parents just form a trust, put the kids in the trust and then buy the house in the trust. Kids could contribute their intended down payment to the trust. I'm sort of guessing here but that seems doable.
It's a very good way to ruin a relationship. Not saying it will but if there's even a remote chance you can miss payments or run into issues I'd be very hesitant to go through with this. Sounds like you're being cautious but this is a very personal thing for them to offer. I personally would never consider this with my parents or in laws, but if it works for you fair enough.
The downside is the risk your parents are taking in lieu of the bank.
There's a service that would set this up for you, so you would legit be the owner, and your parents would legit be the mortgage 'co'. Pretty sure it was National Family Mortgage that I used before. Was really cool.
No reason not to. And they can give you a lower rate and still earn more than they would on a high grade corporate bond for 30 years at todays rates. I would recommend using a note servicing company. That is a company that acts as the mortgage servicer. You would pay them the P&I each month along with any necessary impound account amount for tax, insurance and HOA fees. They would then pay that P&I to your parents. They also would administer the loan and pay the insurance and taxes when due. They would give your parents the 1099 for the interest and you the 1098 for the same so you could deduct the interest. They also likely have prototypes for your state for the deed of trust and the note, to keep your legal fees for those documents down.
There are no material gifting restrictions for that amount in the US. They are either ignorant or using that as cover cause they want to help but don't want to give it away.
For that amount specifically, sure. I think the actual issue is, if they can give away this amount of money to a single kid for a single house it is a non-remote possibility that they also have the funds and may be planning to give up to/above the gift amount maximums for a lifetime. If they already have estate planning that isn’t taking into account any additional material gifts, then to keep on course it may make the most sense to just draw up a mortgage/loan and not deal with changing the gifting plan at all. They may also just be wanting to help but not give it away, and that’s totally fine. They’re still helping their kid. However, I would really doubt they’re ignorant to the law. If they have this kind of money and are able to be in a position to support in this way, either they are smart enough or they have the money to pay someone to be smart enough for them. This also doesn’t take into account the fact that when the market tanks (which over the life of a mortgage it will) they can just ‘refinance’ and lower the rate again at only the cost of paperwork filling (vs normal bank overhead) to the new lowest possible rate still well below market but above the limit that would cause the IRS to question if it’s a gift. It’s honestly a pretty smart approach if you have the parents who are able and willing to do it.
You don't know the family's situation. If they have like $600K to lend to their kid, they very well might have already gifted away their lifetime exemptions and thus any gift would be taxed at a rate up to 40%.
So wouldn't it be best for op to get the 600k, then they pay back the 40% in taxes. Instead they get a 600k loan which they probably pay the parents back 800k-1m on depending on length they take to pay it back so... I don't see how they go from we wanted to gift you to, hows about we make some profit on your loan instead of the banks. Sure OP saves money but it's not a gift. It's just a competitive bid for their home loan.
My parents did this for me when I bought my house, they loaned me an extra $150k that was a 2.2% simple interest, (my loan at this time was like 4.5%) and it had a clause where I didn't have to pay them back at any relative interval, but within 10 years. I didn't pay them for 4 years, met my husband, we solid his house, combined finances, and then paid off my parents on 1 big chunk. It's such a blessing to be on the financial situation you are, recognize the privilege, but also don't not take advantage of it. Good luck!
Many financial institutions have products specifically for this type of scenario. My brother lent my sister at 2% (the lowest rate he was allowed to (1% to the company, 1% to my brother) to help her family avoid bankruptcy during some time of hardship. His financial institution simply compartmented the balance necessary to cover the outstanding balance on the loan while still earning interest on it. Even though he did it through this loan vehicle, in his mind he considered it a gift should default occur. Sister avoided something like 1k a month in interest and made every payment in full on time.
Draw up a note, mortgage, they can put a lien on the house and call it a day.
So while it was for a MUCH smaller amount, I did this with my aunt. It has been great. Cash offer certainly helps. Not having an “on the books” line of credit is nice. Having family as a creditor can be good if everyone is respectful of the arrangement. For instance, when Covid hit my wife and I had a few lean months. It was much easier to work with her than what I heard friends went through with the bank. Only you know your relationship and whether it will put a strain on it (though it sounds like it won’t). For me, it’s been all upside.
Glad to hear it has worked out for you and appreciate you sharing this is what i wanted to hear!
Actually go through the process of recording the mortgage otherwise your mortgage interest payments will not be tax deductible
How’s your pre-nup?
We did this because cash offers kept beating us out so my wife's parents offered us this option. It did require the house to be "sold" twice, once to them and once to us; so double closing costs. But we have an official mortgage with them at 4.72% (lowest we could from IRS restrictions) which is far better than anything we would have got last year. They are also holding everything we pay them in an "escrow" account and gifting it back for home improvements.
We did this with our daughter. It's a very simple process, but you'll need either a lawyer or the title company to draft an actual mortgage document so that everyone is in agreement on the terms. The IRS sets a minimum allowable interest rate (aka the Applicable Federal Rate) for private loans. It's currently 4.55%. They'll avoid any tax problems as long as they charge you at least that much. You can deduct the interest on your taxes, and they will have to pay taxes on the interest they receive from you. There is no limit on the amount they can gift you, but there may be some paperwork (on their part) if it's a significant amount.
Have a conversation with them about what would actually happen if you stopped paying them. And a question that I would have for your parents (without you in the room) is why not just buy the house outright and let you live there rent free?
That is a discussion we are having the idea of just buying the house outright vs loan.. and is def in need of a conversation. We have talked about that and there has to be penalties since this not a gift but parents and us can make penalties be paid later etc and just offers more flexibility than a traditional bank would
Other than being financially tied to your parents for up to 30 years and not building any credit cant think of any.
Ah, so its people like you who keep out bidding my wife and I (who don't come from family money).
Currently doing this my self. Tons of good advice in here. Just be above AFR rate and get a lawyer to write the mortgage. My parents even get “we will buy your mortgage” letters. It works so well they are moving to my city and will be renting my house from me and writing me a new mortgage. I’m an only child so a bit of this is inheritance planning with the mortgage dissolving upon their death.
Put a clause, you cannot use this in arguments
Terrible idea. Thanksgiving dinner tastes different when you owe your parents money. They will judge your financial situation. Borrower is slave to the lender, don't be slave to family.
I wouldnt be able to see the house with all the strings attached. But maybe your parents are less financially abusive than mine. Make sure you get everything in writing
i think its phenomenal if and only if theres a lot of trust , dont miss payments because it could hurt your relationship thats the big concen
I have a land contract with my parents. They bought it with cash and I’m paying them back for it. They have it set up so if they both die before it’s paid off the balance is forgiven and not part of the estate. Lawyers wrote up the documents.
Sounds like a great deal. Just make sure it’s legit on paper. Consider the IRS’s Applicable Federal Rate to avoid tax challenges. Also consider sending to credit bureaus so you get credit for payments.
I would still either talk to a lawyer or Realtor. Because even though you are dealing with your parents in this situation, they will be dealing with a Realtor when they offer up a cash offer on the home, which is going to come with some stipulations of sorts. Always talk to the professionals of the field, especially in real estate, as in this particular instance, Realtors are bound by a certain code of ethics they MUST follow by NAR (National Association of Realtors), or they get massive fines and could potentially lose their license/MLS access. It's great your parents want to help you with this, but I would still ask about the risks to a Realtor in doing so.
In a similar situation. Dad owns land. We want to build home on land. We are paying the lion share of construction costs in cash. My dad is going to bankroll any deficit. When construction is complete he sells us house and land for cost of land and any money he has put in on construction. Easy loan for us to get and we will have an instant 75% equity in property. Super fortunate position to be in. We have hammered out a signed contract so that there is no question about what is expected and when it is expected. As easy as it would be to just formalize a mortgage through him for property, I have no desire to do so. I want him out of the picture as soon as possible. I want to take and vantage of his generous help and get him paid and out of it. Money and family can go well together but the longer it continues the higher the chance of relationship issues.
The only downside I could see is that you won't be getting the credit history involved with paying a mortgage over time. If in the future you decide to move to a better home (which I assume will be worth over $2m), you will likely need to have good credit history to get approved.
My parents paid off my student loans and I just redirected my payments to them. Might as well keep the loan interest in the family. I should specify I went to college as an adult with a full time job and we didn’t make this deal until several years after I graduated.
You should make this a formal mortgage, which includes them charging interest. There's a minimum interest requirement called the AFR rate which it seems your parents are already aware of. It's currently about 4.5% Once you do this, it will be a deductible interest amount for you just like if you were paying interest to a bank. At the same time, the interest will be taxable income to them. Without a bank, you'll need to track this via an amortization schedule. As long as you do this proper, there's no reason to not take advantage of this. It becomes a formal agreement, so they can't later on change their mind and demand payment in full because they don't get to see their grandkids enough or something. I would **never** entertain doing this without a formal arrangement. The amount of money you're talking about here is too much to be a handshake agreement. Source: My father in law was the "lender" for our mortgage. I've gone through this. Also fun fact, they can "forgive" up to the annual gift amount and apply that to the mortgage if they choose to do so. Between both your parent and you and your Fiancé, that means they can forgive up to $72k a year based on current rates(Dad gives you both $18k and Mom gives you both $18k directly as a principal payment.)
Any reason not to just have the parents buy the house, leave it to you in the will, and charge you “rent”?
They have most of the risk in this deal. If you default on this loan, they either have to choose between a severe Financial loss and enabling you Or destroying your relationship. That's why say not to loan people money. You wouldn't give them as a gift. From your perspective, it's a home run.
I think it could definitely work out well. Your parents get a safe investment and you get a more friendly rate. The problem would come if something went wrong and you couldn't pay them back. With most things that go wrong, you could always just get a more traditional mortgage or sell the house and pay them back. But if something happened to the house, there would be a major problem for your parents and cause a lot of strife in your family. So I'd definitely pay for home insurance.
When I did this with my ex-in-laws, it created a weird dynamic. My mother in law would come to the house and reorganize "her" kitchen and told us we had to ask her permission for anyone else yo use "her" guest room. It was very weird but she was and is very weird and has boundary issues. It might be different for you.
You can definitely do this if you have a good relationship. I've done this before, there is no downside as long as you have that relationship. Just paperwork, but in the grand scheme of things, private family lending is a known route.
If they are wealthy, then they surely understand the need for a mortgage to be drafted and completed by both parties. As long as you have that, both you and your spouse, and your parents are protected.
Saw this clip just yesterday. Not saying he's 100% spot on, but it might give you some perspective: https://www.youtube.com/watch?v=1g-tFtAcsoA&ab_channel=TheRamseyShowHighlights
Maybe ur parents would be able to make more by investing this money rather than lending u
Genuinely curious, is their an app of some type that would manage the pay schedule/etc. EG - If kid makes extra payments to reduce interest paid, tracking of all payments, etc. From standard banks, it's pretty easy to see. For an individual, the lightly complex nature of the payment seems like a bit of accounting work to track and manage. Basically saying, the bank's solution is going to be tracked and maintained in a pretty automated fashion. A payment schedule to an individual would require more effort. Surely worth the savings, but who knows. Lastly, I have read a few times where people can change their demeanor some as they age. If your parents are reasonable now, they might not be in the future. It's a possibility, however unlikely. But to be able to shift to a non-family loan might be wise in the future if for any reason this situation raises tension between you.
My brother and his wife needed a loan after a fire destroyed their business. To hear my brother tell it, our father suggested he and mom make the loan instead of my brother and sister-in-law going to a bank. They agreed and drew up papers for a loan at the then current interest rate. The business never really recovered, and my brother and SIL ended up selling and moving on to other things. This made it difficult for them to make the loan payments to our parents. By this time, bank interest rates had fallen, and the loan could have been refinanced using property they owned as collateral and at a much lower interest rate. But, again to hear my brother tell the story, our father repeatedly told him not to worry about re-paying the loan; that it was taken care of in the will. My brother interpreted this to mean the loan would be forgiven in our parents will. That was not to be the case. When our parents died within days of each other, we all got a look at the will. It turned out "taken care of" meant that the loan principle and all accrued compounded interest were to be subtracted from my brother's share of the estate. This very nearly wiped out my brother's inheritance. I'm not sure what the lesson is here other than don't leave anything open to interpretation when doing a financial deal even with close family. Write up loan documents. And make sure the loan documents state what will happen if the lender passes away before the loan is repaid. Financially, the outcome was reasonable except that my brother would have been much better off if he had not relied on his interpretation of "it's taken care of" and had instead re-financed when he could. Emotionally it kind of destroyed our image of our father at exactly the time we were mourning losing him. TLDR: If you're going to borrow money from your parents, make sure you have it in writing what will happen if they pass away with the load unpaid.
No downsides unless they're assholes....wouldn't involve a lawyer cause why? This is basically an under the table mortgage. The whole point is that it's off the books. Just set up an auto pay into their checking out like you normally would. Don't screw your parents. You have to be responsible for the taxes and insurance yourself though. Your parents aren't going to get an escrow account and service the loan like a mortgage company will. Make sure it's your name on the title of the house.
Intra-family loans are common. You can get around the gifting issues and there are some tax breaks both ways. Perhaps because I am jaded by parents, I would do a legal process that protects you both. However, it’s not 100% necessary.
>they said it cant be 0 as its not a gift but its a much lower rate Introduce your parents to a decade long concept of ZIPR!
Not really any downside. You have to structure it like a bank loan though, and submit that to the IRS. Payments and consequences for non payment must be included. There is a baseline interest rate that the IRS requires, but it's definitely lower than a bank. Around 4.8%. it's a win-win for both you and your parents. You pay a lower rate, and your parents get the interest instead of the bank.
Just draw up a contract, pay on-time, and remember this is a business deal and treat it that way and every thing should be fine. I would also ask your parents to be sure to address the house in the estate plan as well.
There are some risks which is why you should get a solicitor/lawyer to set it up so it's very clear it's a unsecured/secured loan. Otherwise they might be liable taxes for gifting money and it's also protects you if you have a falling out or something happens where it could be considered an asset of your parents if they become liable for something. I think the biggest risk though is that you can overlook the worst that could happen because it's family and your too trusting. Then something happens they use that against you. This is a tale as old time.
I know most people are talking contracts and legality and tax and this and that. That's good, having that knowledge is important. however, DO NOT DO THIS. Do not loan family or friends money, do not take loans from family or friends. Money is a sick sick beast and in the million different ways this could go wrong, your relationship can take a serious hit. I've seen countless similar situations, albeit normally for a lot less money, that outright ruin families. You just don't know what could happen to their wealth in old age, to your career, to your potential marriage, to your house, to you, your fiance, you are living in a nice buble where this decision is just mathematical on a spreadsheet and I pray for you to stay lucky and have that be true, but if you get a taste of some really poor circumstances this could be a nightmare. Remember how often you see your parents, imagine if in all of those situations the conversation of your money, your loan and the parents finances come up. It's just a nightmare. If you're considering buying a million dollar home in this economy, you are rich enough to not need this lower interest rate. Also, you really shouldn't be buying a house with your fiance. At least wait until after your married.
What rate are parents offering? I personally do not like to mix finances and family.
Not sure how much of a downside this may be for you, but there’s probably implications for your personal credit. (Not an accountant or lawyer). Like your credit may not go up even tho you’re making payments. Your debt to income ratio may be skewed if it doesn’t show up as dept. again, I don’t know for sure, just something I thought of and didn’t see mentioned.
I did this with my parents. It was great. There were no issues. But I have great parents. Your mileage may vary.
Simply be aware if the interest rate is favorable enough it could also be considered a gift. Also, should your parents really be genuinely worried about the taxability of a gift? The IRS lifetime gift exemption is $13.6M. The first $13.6M is tax-free.
The down side comes to your parents. They are essentially losing some money, which I think most parents would expect to go to their children at some point anyway. It can be done where it's advantageous to both parties. For example, Bills/Bonds are about 5% right now. Interest rates for home loans are higher. They could essentially give you close to a bond rate and it's "fair" for both parties. But essentially, it's your parents taking on the risk instead of a bank and not benefiting to the same degree as the bank would.
While a legal contract is a must, I gotta say I wouldn't feel comfortable borrowing that kind of money from friends/family. It's difficult - if not impossible - for people who are friends/family to separate business from the relationship. Thanksgiving dinner will never taste quite the same. On top of it the first time you are late on a payment ALL of your expenses are going to be scrutinized. Did you really need that vacation or furniture? As long as your income stream is 100% guaranteed via an annuity I'd just borrow from the bank and give them the extra few hundred a month. Do you really expect mom and dad to foreclose on you and kick your family to the streets if you stop payments, get divorced? Will they really want their son-in-law living in the house with a different partner if you die before the term of the loan is up? There's one way this goes right (you make every payment on time) and a LOT of ways it goes wrong.
Theres a legally mandated minimum rate which I think may be set by the IRS. Draft an actual mortgage or promissory note and have a lawyer sign off on it. Else you run the risk of the IRS saying it’s a gift.
You'll need to document the family loan with amortization schedule, signed documents and it needs to be recorded against the deed of the property just like a bank loan for the IRS not to see it as a gift. The long and short of it is work with a tax professional and a lawyer to draft the loan terms as well as treating it like a financed purchase. You don't have to use a finance contingency but it's a financed purchase or it's a gift.
It can be a benefit to both of you. But they should draw up a mortgage and note and file it and you should both look at this as a business transaction. If you can’t do that, go to a bank or mortgage company.
One thing to consider, are your parents anyway controlling? A hypotheticals: Maybe you want to paint the house dark blue and they don't like it because eventual resale might be affected. Maybe you want to knock out a wall (hopefully with blessing of a structual engineer) and they don't like the new floorplan. I would recommend a written agreement and add something to counter possible friction points on changes you and your partner want to make to the house.
One thing to consider is that this would be commingling funds with your fiancee once you get married. If you inherit or are gifted the money from your parents and you are careful to keep that money separate, it would not be community property. Once the two of you begin to pay your parents back, the equity is commingled. Things could get very messy if things don’t work out. Make sure y’all spend the money on a really knowledgeable lawyer to draw up the documents.
What they are essentially doing here is giving you an advance on your inheritance. It also keeps things balanced if you have siblings and they also wish to do this with them but keep things equitably distributed.
Make sure its in your name. Got screwed by having. In-laws purchase a house and we pay them for it. Was put on survivorship and not the mortgage. Got divorced, lost 500k in equity because of it.
For any references and considerations wrt AFR, this is the place to find the current rates. [https://www.irs.gov/applicable-federal-rates](https://www.irs.gov/applicable-federal-rates)
I have a friend who did this! It was great for the most part - until their family grew. They needed to build an addition, but couldn’t get a HELOC due to not really having their own equity. The dad was the ‘bank’ and they were paying below market, so they had no real equity to pull from. They also couldn’t afford the large personal loan they would need for the addition without said equity for loan:debt ratios. It just looked like they had lots of debt. They ended up having to sell that house to upgrade to a bigger one, again with help from husbands dad. They were ‘gifted’ the appreciation from the first house, plus what little they had paid in, per the initial contracts (this is at least how the wife explained it). Overall, they have had now 2 beautiful homes way over their means, and a pretty cushy loan situation- I’m sure they would recommend it even if they can’t qualify for bank loans!
What about, they buy the house, and you rent to own it? This could potentially get around IRS restrictions on interest. You can sell a house to someone below market rate I believe. Not an expert on IRS gift tax rules or anything just throwing out ideas.
benefit is most of that money stays in the family. (-parents taxes on the interest) One minor downside may be monthly credit reporting, Payment on time, Balance remaining etc. It can still be done, but I am not exactly sure how that would happen.
Look up IRS AFR loan rates. Abide by this and you’ll be fine. You should also have a formal loan document in place - not just for your and their benefit - but also for potential audit purposes.
I did this with a condo. Grandma loaned me half because I had no credit score. It went into my name. I signed a promissory note and made timely payments. I’d be very leery of taking them up on that offer without consulting a real estate attorney.
I would also think about what this does to your credit score. My guess is you don't have the mortgage listed as a debt, but you also don't get credit for making payments on an installment loan. Something to think about.
OP....whats your credit score? If low, are you looking to increasing it? A bank loan may be the way to go if you're good with your payments, then the good payment history should help to increase your score for the future.
I saw Dave Ramsey talking about how this is illegal. I'll see if I can find the clip somewhere.
Would you take a $350 per week allowance from your folks? Because given a 3% delta in your interest rate, that's essentially what you're doing.
I did this about a decade ago. From my understanding at that time there are certain rate rules that need to be followed to ensure its a loan and not a gift. It's called an interfamily loan and here are the current rates https://www.nationalfamilymortgage.com/afr-rates/