One question your Atlanta mortgage broker likely gets asked is whether you should loan money to a family member for her mortgage. If you’re a parent, you might feel inclined to help out an adult child, or you might want to help out a sibling who needs a little extra financial help.
But is loaning to your family member a good idea? Can it hurt you? Here are some things to consider:
- The potential for conflict: Any time loaning money is involved, there is the potential for stress and tension. While things may be going along fine, what happens when the sister you loaned the money to loses her job and can’t pay you the amount you agreed upon for the next few months? If providing the loan depletes your savings or takes a big chunk of your retirement fund or money you’ve saved for your kids’ college, will resentment build? Will family gatherings turn awkward?
- The impact on other family members: If you’re helping out your son, how will that affect your daughter? If you loan money to one child or family member, you could be setting a precedent or expectation among your other relatives. You need to be sure you’re prepared for the full ramifications of what can happen to your personal relationships if you decide to give one family member a large loan.
- The tax consequences: If you give a family member a substantial amount of money and you aren’t charging enough interest, you could wind up being taxed for it, according to Nolo. In 2014, the annual gift exclusion amount is $14,000, meaning you can give someone up to that amount and not be taxed on it. If you lend them more than that amount, you either pay taxes on it or have to write up a formal loan agreement and charge at least the minimum federal interest rate. An Atlanta mortgage broker or lender can help you determine the amount of interest you should charge.
- Getting it in writing: While it might seem a tad too formal to ask a family member to sign a written agreement, it’s a good idea. Having it written down spells out the monthly payments, interest rates, total amount being borrowed and what happens if payments are late. It also sets out how much extra can be assessed and how long of a grace period you will allow.
- Insisting on collateral: You can consider asking your family member for collateral. It gives you some assurance if she fails to repay the loan, and it is also a subtle reminder that the loan should not be taken lightly.
If you decide against granting your family member a loan, you can help guide her to a qualified mortgage broker or lender, who can help her explore the various loan options. Because interest rates are still attractive, it’s a good time to get a mortgage loan from a lender.
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