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Things to consider when getting a personal loan to from a family member to buy a home?

My wife and I are looking to buy our first home. One of my wife's family members is well off and offered to loan us the entire home loan amount in lieu of taking out a conventional mortgage loan (saving interest, PMI, etc). We are both extremely comfortable with this person and consider it an incredible gesture. We would get a loan from them to pay for the entire home in cash. We would then setup a direct payment to them paying monthly payments at approx 3% interest. Given this scenario and the fact that the entire family knows and is comfortable with it - are there any other considerations one should take into account when entering into this arrangement? Open to any and all advice as this is uncharted territory. Thank you!
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June 25 2011 - Orland Park
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Some other considerations:

- I would agree you must check on the tax implications of that kind of large 'gift' - check with cpa

- Know that you get to write off the interest paid on a mortgage loan on your taxes, not sure if this is still the case with a family loan - check with cpa

- Be sure to discuss with your wife how you plan to handle taxes and insurance. Many first time home buyers like to have an escrow account set up with their lender that collects a little each month for taxes and insurance. If you pay cash then you will be responsible for the entire amount of taxes in one lump sum at the end of the year, same with your homeowners insurance.

- Go over what happens when you go to sell the house. More than likely you won't stay in this house for 30 years so be sure to discuss the pay-off with this person.

- The only other slight drawback can be not building any credit. Even if you don't need credit to buy this house you may want to be building it some other way because you may want it for other large purchases like a car or anything you don't want to pay in cash up front

Although you are comfortable with this person a legal document is a good idea. After all this is carefully considered and you know what you're getting into then go-for-it and good luck!!
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June 25 2011
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Appreciate the feedback everyone!
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June 25 2011
No, I have heard of this a lot. I have also done this quite a few times for people. There are a lot of first time buyers who want to buy but cant afford to pay for it or get a loan, so they do what you are talking about. I would have your attorney draw up a Articles of Agreement. This would be the best way to protect both parties. If you need further help on this, I would be happy to go into more detail.
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June 25 2011
Profile picture for wetdawgs
Have it written up by a lawyer, and make sure you deal with title insurance etc.

Use an interest rate that is market rate that you can clearly document at the time of initiating the loan, otherwise the person offering the loan may have to pay taxes of the gift to you between market interest rate and interest rate you are paying.

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June 25 2011
 
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