While I do not often use profane language in articles, especially titles, I have taken this chance to use a bit of this language to illustrate how enamored I currently am with intrafamily loans. Intrafamily Mortgages Are Pretty Damn Sweet, and in case you don’t know – bomb as shit is a good thing. Very good indeed.
I was recently introduced to the concept of intrafamilial lending or intrafamily loans. It can be short, middle, or long term, small value or large value. A family member (“ANDIE”) heard I was buying a house and said that they had money due to some ramifications of a parent company selling off the company Andie worked for requiring them to liquidate parent company shares which it was no longer affiliated with. (Unfortunate and odd, I know).
Well, this was a bit of a pickle. Transferring large sums of money is not easy if you’re a normal middle-class non-corporate person (I specify non-corporate, because apparently corporations are people).
Well, you can gift money to certain family members, but that gets you about as far as dog shit at a slingshot contest. Even if Andie is with Andi and they both gift the federal maximum we’re looking at around $30,000. And $30,000 does not buy a house where I live.** Of course, this transfer of money is one directional. Andie and Andi can’t legally expect repayment of a gift. Because it’s a gift. That’s kind of the whole definition.
“Gift (n). 1. something given voluntarily without payment in return,“.
And the IRS will hold you to that. So what else is there?
Enter Google. Google tells me that if the lender (be it a bank or Andie) charges you interest it’s a loan. Not a gift. Hugely different legal ramifications with the IRS. Andie can lend Wallet Engineer #1 huge sums of money to buy a house as long as Andie charges interest above a set Federal value and documents the procedure.
That set Federal minimum varies depending on what the Fed rate is, etc. Last I check – for July 2014 – the long term rate was 3.02% for loans >9 years. There are two other categories – short term and mid term which have much lower minimums.
This process requires some paperwork, of course. You don’t strictly need a lawyer, but you should get one. You’ll also need to get a Promissary note involved and a deed. Also, usually the county clerk/recorder. I won’t write about it here, but I will say that there is a website that will do all the paperwork for a flat fee.
www.nationalfamilymortgage.com (no affiliate or anything) — I e-mailed to get information on how this all works, and a man named Tim Burke called back within ~30 minutes or so. (After Googling his last name right now it turns out he’s the CEO). Tim Burke has the same tonal qualities as my favorite public radio host Ira Glass (This American Life) as well as an uncanny pacing of words that makes Ira perfect for radio storytelling. Go Tim. He told me about how the process works, etc. as well as why my state of Colorado does not allow intrafamily loans. (Side note: 47 states do allow these types of loans). *
It’s all pretty easy. If you sign up for a Gmail account, I’m pretty sure you work with Tim.
Why Intrafamilial Loans?
Well – all the money stays within the family. Including interest!
No PMI – ever!
No bank fees! Wooh! Origination fee? $500 appraisal fee? Nope! $50 service charge to pay your insurance for you! Nope!
Lender gets a rate above what’s generally available – yes!
Borrower gets a rate below what’s commercially available – yes! (I could get a 22 year at family rate vs a 30 year at 4.375% with the same mortgage payment.)
Only great if someone in your family has a lump sum of cash.
Only great if that lump sum of cash isn’t tied to their livelihood or retirement.
I personally would NOT lend to someone in my family if they did not already pre-qualify for a commercial loan through a bank. My main focus on this type of loan is that it keeps returns in the family and lowers rates for the borrower.
I do not recommend this path as a fix for poor credit, etc. although some do advocate this to break the “renter cycle” – which in itself should be a detailed calculation with something like Rent Vs. Buy calculator.
If you don’t use a website, set clear expectations in a legal contract drawn up by a lawyer. Loan repayment, etc.
** – If you’re married and both people have two living parents you can get $14,000 x 4 = $56,000 in gifts. Still not enough to buy a house.
*For our dear reader C: Colorado has a very broad definition of what a mortgage lender is. This may seem like a good thing, however the problem lay in that there are no exceptions within the broad definition. Unlike all other states where there are exceptions to a lender like if do two or less mortgages per year, if your mortgages are less than $250,000 per year, if you lend to people who are legally related to you, etc. Colorado has no such exceptions/exemptions. Thus you legitimately have to be a larger corporation or credit union to be a qualified lender.