Can I Borrow Money From a Family Member to Buy a House & Pay Them Back When I Get My Tax Return?

by Fraser Sherman
If your family helps you buy, you may need to treat it like a business deal.

Even if you can't convince a bank that you're good mortgage material, your family may think differently. If, say, your sister or father has the money, you can borrow the entire amount at a good interest rate, though it will probably take years to pay back. To pay them back from one tax return takes either a very large refund or a very small loan.

A Win-Win Arrangement

You can't borrow if your family isn't willing to lend you the money. If you approach it like any other loan, it can be a win for both of you. You get a rate that's lower than the bank offers. Your sibling or parent gets a steady rate of interest on the money, in many cases better than a CD or similar safe investment brings in. You can negotiate better repayment terms, and family may be more understanding if you have to miss a payment.

The Gift Tax Trap

If your mom has the money, she might be happy to write you a no-interest loan, but that has drawbacks. A large loan that's substantially below what the IRS considers a reasonable interest rate counts as a gift. A $200,000 mortgage with no interest payments would be large enough that your mother might have to pay gift tax. The IRS-acceptable rates are still lower than the market rates, so charging interest shouldn't hurt too much.

Down Payment Borrowing

If you don't want a long-term loan, borrowing some or all of the down payment may seem a better option, and easier to pay back. Your lender, however, probably won't go for it. With a borrowed down payment, you're buying the entire house on debt, which makes you a much riskier investment. Getting down payment money as a gift is usually fine with lenders. However, your family may not be able to afford that as easily as they can a loan.

Making It Official

To prove that your family loan isn't a gift, you need the full array of paperwork, including a promissory note and a lien on the house. A formal, legally binding agreement is safer for both parties: Your brother can foreclose if you default, but he can't call in the loan just because you had an argument. A default or foreclosure is almost certain to lead to angry feelings on both sides, so consider the risks before you sign.

About the Author

A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.

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