Helping my sister-in-law buy a place

[bank5]

My sister-in-law has been renting for about 2 years but recently thought about buying a place. She has a solid job but hasn't been working for that long and doesn't have much for a down payment. My wife and I have enough in savings that we could help her out a bit.

Can anyone think of a good option or way for us to help her out? I was thinking we could give her the extra that she needs for the down payment and then have an agreement that we would own that percentage of the place.

 

[Buckeye]

If she has not owned a home in the previous 3 years by the end of this year (or is it 12/1?) she is eligible for the stimulus credit of 10% of the purchase price up to $8,000. The benefit begins to phase out (I think) at $75,000 and she can file an amendment to her 2008 taxes to get the refund now.

Maybe you can front her the $8,000?

 

[Rambler]

How best to help her really depends on the circumstances. For example: my SIL (DW's sis) is in dire straits every month. She doesn't make much money, but she does make enough for her "needs" when she has her priorities straight. She called 4 or 5 days ago to tell us that she only had 40 bucks to her name until her payday on the 15th and needed some money. A couple days before that she had just bought a load of new clothes (that according to her mother she does not need - her mother does the laundry, so she knows). Anyway, SIL knows we have money (not how much) and is forever asking to "borrow some" which has never been nor will be returned.

This time DW told me "no way I'm ever giving her another cent". This is because SIL will never learn how to stand on her own feet if she is continually coddled...by the way, she is 50 something and still getting handouts from her mom too.

So, we figured this time "tough love" was the best way to help her. If you decide to help, I suggest making it formal, with a market rate loan as a second on the deed. Otherwise, you may never see your "help" again. If it isn't market rate, the IRS may want to have a word with you about this "deemed gift" (and the taxes that go with it).

Source: BTDT - Got the T-shirt...

R

 

[ziggy29]

If it isn't market rate, the IRS may want to have a word with you about this "deemed gift" (and the taxes that go with it).

Generally true. There are some exceptions, though, particularly if the loan amount doesn't exceed $10,000 and the interest foregone in a below-market rate transaction is treated as a gift. The exceptions are detailed in IRS Publication 550.

 

[bank5]

This time DW told me "no way I'm ever giving her another cent". This is because SIL will never learn how to stand on her own feet if she is continually coddled...by the way, she is 50 something and still getting handouts from her mom too.

I agree with 100% with tough love is the best approach when people are irresponsible with money. Giving them $ doesn't really help them out, it will just prolong the problem. I caught a quick clip of Suze Orman the other night and she said when you lend people money think of it more as giving people money that you might get back.

In my SIL's case she just graduated from college a couple of years ago so is just starting out. She's a hard worker, has a good job, we've never helped her before and she's never asked for anything from us.

 

[bank5]

If she has not owned a home in the previous 3 years by the end of this year (or is it 12/1?) she is eligible for the stimulus credit of 10% of the purchase price up to $8,000. The benefit begins to phase out (I think) at $75,000 and she can file an amendment to her 2008 taxes to get the refund now.

Maybe you can front her the $8,000?

This might be the best option. I just read through this - http://www.federalhousingtaxcredit.com/2009/faq.php#1 which has some helpful information on it.

 

[bank5]

Generally true. There are some exceptions, though, particularly if the loan amount doesn't exceed $10,000 and the interest foregone in a below-market rate transaction is treated as a gift. The exceptions are detailed in IRS Publication 550.

I thought the limit was $10,000. Thanks for pointing that out. That's good to keep in mind.

 

[ChrisC]

I thought the limit was $10,000. Thanks for pointing that out. That's good to keep in mind.

The annual "exclusion" limit for reporting gifts is now $13,000 per donor for 2009, which means sister-in-law can receive $26,000 from you and your spouse without tripping gift tax reporting. It's IRS publication 950 which has the basic rules. Here's a helpful short digest of the rules:http://www.smartmoney.com/personal-finance/taxes/when-to-file-gift-tax-forms-9555/

 

[FUEGO]

I would usually say "don't get involved" but that free $8,000 of government money just sitting there would definitely motivate me to help out a sibling. That is, if I knew the sibling could handle the financial end of the bargain and pay me back. Options include cosigning, lending the money to her (if you have it) in the form of a full mortgage or the 20% downpayment as a second mortgage. The deal would be less risky to you if the value of the house was close to $80,000 so that the loan to value was around 90% from the start. Or maybe a condo/townhouse depending on the location of the residence.

I am thinking about doing this exact same thing for my BIL in some form or another.

I was also considering selling my house to my children, but I realized there is an exclusion in the tax credit that disallows a credit when the house is sold to a related party buyer (lineal descendants or ancestors).

 

[ChrisC]

I would usually say "don't get involved" but that free $8,000 of government money just sitting there would definitely motivate me to help out a sibling. That is, if I knew the sibling could handle the financial end of the bargain and pay me back. Options include cosigning, lending the money to her (if you have it) in the form of a full mortgage or the 20% downpayment as a second mortgage. The deal would be less risky to you if the value of the house was close to $80,000 so that the loan to value was around 90% from the start. Or maybe a condo/townhouse depending on the location of the residence.

I am thinking about doing this exact same thing for my BIL in some form or another.

I was also considering selling my house to my children, but I realized there is an exclusion in the tax credit that disallows a credit when the house is sold to a related party buyer (lineal descendants or ancestors).

If your relatives need assistance for purchasing a home, loans from you might screw up the financing they might be able to obtain elsewhere. Conventional and FHA lending generally will not permit a relative to make a loan to fund the downpayment on the house, and documenting a second mortage from a family lender could be tricky. If the "loan" would pose problems, then one option is to "gift" the downpayment, with some sort of general (and not legally enforceable) understanding that the gift would be returned in kind under certain circumstances; another is to gift the downpayment, but include yourself on the deed -- this might only work for conventional financing. Any loan underwritting or residential mortgage lenders out there to offer additional advice?

 

[DangerMouse]

Bank5, we have been acting as loan officers to members of our family for some time. I can only comment on the emotional side of it rather than the tax implications or what the bank may see.

First, I would not take a % of ownership in the property. I have found it best to do these transactions at arms length. Good old Suzie Orman said years ago you can't lend people money and then tell them how to spend it, and I have to agree with her.

Our recent loans have included money to my sister to refurbish her kitchen and a loan to my SIL to enable her to move to a better home. We do not have any written agreement for either amount. However, both have set up payroll deductions and biweekly the amount agreed hits our bank account.

Our reasons for becoming involved is we did not want my sister to suck out equity from her home to do the kitchen renovations. Rather we want her to see what it costs and to get that amount paid of separately. In the past she has always done well out of housing but has managed to fritter the equity away. As she is now in her 40s we want to ensure that she gets her house paid of in 15 years as is her aim.

With SIL their previous residence was tiny and our loan enabled them to take on a mortgage they were comfortable with.