How to borrow money from your parents or in-laws
Chase has competition. The Bank of Mom and Dad is now the seventh largest home lender in the United States. A recent to study from Legal & General Group revealed that parents loaned their children a total of $47 billion in 2018, which helped buy 1.2 million homes. In other words: one in five parents helped finance the purchase of $317 billion in homes. Forty-three percent of those who received help were under 35 years old.
For a number of economic reasons — student loan debt, stagnant wages, exorbitant rents, the extreme cost of daycare and the like — it’s no surprise that more and more millennials are turning to mom and dad for help. to fund their future. After all, their APR is probably pretty low too. And, for the most part, if possible, the parents seem to be fine with dealing with the money. But even if all parties involved agree to the arrangement, money changing hands can change relationships. Guilt and shame are often present. Moreover, questions persist: what is the plan to repay the loan? Is the gift just a way for parents to keep you under their wing? Does your spouse agree to accept such a big gift? What will happen if things go wrong in your marriage? Will the money serve as leverage later?
The truth is, even if your parents are ready and willing, it can be difficult to ask someone for money to buy a house or subsidize other costs. To guide you through the discussion, we spoke to several legal, financial and relationship experts to help you manage any exchange of funds from mom and dad’s bank.
Define the conditions in advance
Loans from parents and in-laws can get tricky when unset expectations don’t match reality. Perhaps those who accepted the money are slow to repay the loan, but still go out to dinner and go on vacation. Maybe mom and dad won’t stop asking when you’ll give them their money back. To prevent such scenarios – and many more – from occurring, the transaction should be treated as a business decision and all parties should spell out the terms of the loan upfront.
“If it’s important to you that it be seen as a loan rather than a gift, make sure everyone understands it in writing or at least verbally,” says Carrie Krawiec, a licensed marriage and family therapist. Even with the stated conditions, understand that personal feelings will always arise and complicate matters. “Assume the issues and communicate ahead of time if you can,” says Amanda Clayman, financial wellness advocate for Prudential. “During the time the loan is ‘open’, try to withhold judgment and believe in the best – for your own peace of mind.”
It’s also important that everyone is on the same page and that personalities are considered before money changes hands. Make sure you understand what the boundaries are when it comes to other family members. Is it a united family? If so, chances are your or your spouse’s siblings know about the deal. “Anticipate as many problems as possible and try to identify potential solutions,” says Krawiec. “You won’t get them all, but it will be a start.”
Understand everyone’s involvement
As parents, when you lend money to your child and spouse, it will hurt the other children. And it could also put them in an awkward position regarding your estate. As potential heirs to your estate, it could be their responsibility to claim the loan if something were to happen to you before it was repaid. “It puts them in a really nasty position,” says David N. Pessin, heritage preservation attorney at Pessin Katz Law. “It puts them in a position of being the police all the way and that’s not really fair. You shouldn’t be the instrument of creating conflict. Children have enough conflict without you creating any. one. So it’s about talking to everyone and managing all the angles of the exchange.
Be honest about your feelings
No matter how transparent you are, there could be resentment on both sides. If the parents are frugal, they might feel frustrated that the children are not sharing their tax values and now need a loan. On the other hand, children who find themselves in dire straits might be jealous of their parents’ financial stability. If these feelings arise, it is important to confront them before any transaction. Now, of course, that takes tact. But things will only get worse if such feelings get worse.
Having uncomfortable conversations
Hypothetical situation: Your parents lend you and your wife money for a down payment. A few years later, circumstances change and you file for divorce. What happens now? “How is this going to be resolved? asks Pessin. “Is she going to say, ‘I didn’t borrow any money, your son did. And I’m not married to him anymore, so I’m not paying anything. Even though she ended up with half the house the money was loaned for? » It is important to establish in advance who exactly the money is lent to, what it is used for and what will happen in the event of possible poor results.
Divorce is not the only difficulty you may encounter with an interfamily loan. What happens if a relative dies before the loan is repaid? What if a parent has to be hospitalized or sent to a nursing home and needs the money sooner than expected to pay it back? What if, as a parent, you are concerned about the children’s ability to repay on time, or not at all? Such conversations need to happen before money changes hands, even if it’s uncomfortable.
“People don’t like to talk about unpleasant things,” says Pessin. “But they have to. You have to be honest with yourself and not have a knee-jerk reaction because you need the money and daddy has it. All parties involved must ask themselves: “Is this really the best option? »
Have the discussion in private
It’s easy to have conversations about money on the phone or at a family brunch. But when they move beyond an informal assumption and into a more serious discussion, there needs to be a more professional setting to make sure all the details are ironed out. Krawiec noted that it’s important to have them at a specific time and in private, which also helps avoid any passive aggressive comments or more serious issues that might be raised in a public setting.
Call on a third party
There are many emotions associated with a loan between families. For all the business elements involved in this exchange of money, at the end of the day, it remains a family affair. And that comes with its fair share of other feelings. If that’s the case, Pessin recommends consulting an advisor ahead of time and putting everything in place. “If there are really bad feelings,” says Pessin, “uncomfortable things that need to be said, go see a family therapist, sit down, and have a frank conversation. They can help you figure out the things that will get you going with the legal stuff.