UGANDA, Kampala | Real Muloodi News | In Part 1 of this series, we looked at tips for successfully accepting a loan from a family member for a mortgage. In this next instalment, we explore how to be successful at lending money to a family member for a home purchase.
If you are lending money to a family member, be aware that there are risks involved. Of course, you want to protect your money, but you also want to protect harmonious relationships with other family members, as well as your reputation.
For example, your son may become jealous upon learning that you lent a large sum of money to your daughter when he had a competing need for the money himself. So, it is just as important to examine the relationship sensitivities as it is to be aware of how much you can afford to lend.
Here are four simple things to keep in mind if you’re thinking about lending money to a family member for the purchase of a home.
4 Tips for Successfully Financing a Mortgage Loan to a Relative
1. Only lend what you’re prepared to lose
While you may let your family member know that you do expect your money to be paid back – and paid back on time – things can still go awry.
If for whatever reason your family member is unable to pay you back, you have to be clear about whether or not you are willing to sour the relationship and go so far as legal action/court to get your money back, or if you’re willing to let it go.
Don’t pour your retirement savings into a beloved child or grandchild’s home purchase if you really can’t afford to see that money disappear.
2. Ask about other competing loans
Before banks agree to a mortgage loan, they ask how many other outstanding loans the borrower has, how much income they’re earning, and about their credit history. These questions help to assess if this person will really be able to carry the loan all the way until it is repaid in full.
Although your family member might get offended by these personal questions, take comfort in the fact that it is your right to know if you are to lend them money.
For example, if they are taking out a loan from you for the down payment on a home, but they still have to make a monthly payment to a bank, be realistic about whether they are truly making enough money to be in a position to pay the both of you.
The same is true if they have a history of fiscal irresponsibility. If you are planning to lend a large sum of money, do some kind of underwriting before taking them on their word that they will pay you back.
3. Be prepared for the worst-case scenario
You never know what the future has in store for you. You may fall sick, become incapacitated, or worse. In such cases, what do you want to happen to the loan? Would it become due in full? Would the loan pass to your heirs or estate? Do you intend for the loan to be forgiven?
Think about the worst-case scenario, and put it in writing. Share the document with the relatives who would be affected, so that they can execute your wishes on your behalf if you’re not able to do so yourself.
4. Prepare emotionally to be patient.
Chances are, if you’re lending money to a family member for a home, you truly love them and want the best for them. But, just because you gave them a loan, this doesn’t give you the right to be intrusive. Particularly so if they’re paying you back under the agreed-upon terms.
Your loan does not mean you’re entitled to access to your family member’s home. After all, the bank doesn’t have the keys to your front door.
Also, at times it may be hard to watch your loved one make decisions you disagree with. This is especially true if the decisions could affect your loan terms. But, as long as they’re making the necessary payments to you, you have to be emotionally prepared to mind your own business.
A real-life win-win situation
Robert Taylor used his fix-and-flip company, the Real Estate Solutions Guy, to work out a deal with his 20-year-old son.
“We found a home for sale that was not financeable because of its condition,” Taylor says. “I asked him if he was interested in the home, if we could make the finances work for him. My company would buy the home for cash and then renovate it. Then, we would flip the home to my son. The difference was that we would sell it to him at a price he could afford,” Taylor explains.
They got an appraisal for the new value of the renovated home, and his son was able to secure a bank loan for the amount he could afford. This allowed them to set up an equity participation agreement to make up the difference between the affordable price that the son paid (USh180m) and the full appraisal value of the home (USh250m).
When asked how this works, Taylor explained his son would own 72 per cent (180m/250m) of the value of the home. Taylor’s company would own the remaining 28% of the value. Any appreciation would be shared between them.
Other than that, “the purchase looked like any other home purchase,” Taylor says. “While we owned a portion of the equity, we did not own the home; ownership was completely my son’s. He could keep the house for as long as he liked or sell it whenever he wanted to.”
Taylor’s company recorded the sale to the son, and a deed of trust was signed. When his son decided to sell the home a few years later, the proceeds were divided according to the equity participation agreement, and they both earned a handsome profit.
Not only is it possible to conduct a successful family member mortgage loan, but there can also be benefits for both sides, so long as you remember that this is a business transaction.
Even if the loan is your own child or parent and you’ve known this person your entire life, both parties must do their due diligence to make wise money decisions with their heads, instead of leaps of faith with their hearts.
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