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What is the best type of loan and what is minimum interest he can charge on mortgage loan?

My father is able  to finance my sister and I on a home.  He states that by law he must charge us the "going" interest rate to comply with laws and regulations.  Not certain the following information is needed to answer the question I am asking but I will include it anyway.  
The home is currently owned by my sister and has a lein from the bank and an approximated pay off of $65,000. At the time of the sale we would be adding myself and my sister as equal individuals on the note/title.  He would pay off the mortgage of $65,000 and an additional amount of $85,000 to $130,000 would be financed to repair and remodel the home.  Therefore, the finance amount would be between  $145,000 to $195,000; ($65,000 lein payoff + $85,000 to $130,000 to remodel = finance amount of $145,000 to $195,000).   I am not savvy to all the different types of home purchasing loans available but obviously we want whatever makes our payments the least while obeying all laws and regulations out there.  He has stated that he is willing to finance the home for up to 30 years.  The home would be completely repaired/remodeled with in six months from the sale date.  At that time the home would be valued at approximately $210,000.  The home is located in Stilwell, KS. 
Thanks for taking the time in this matter.
  • January 05 2013 - Stilwell
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Answers (3)

To avoid any penalties that wetdawgs mentioned the rate your father charges would need to be 2.29% or higher to meet 2013 IRS AFRs (Applicable Federal Rates). Obviously current rates are higher so negotiate a reasonable rate keeping in mind your father is doing you a big favor for becoming your "bank". I am not clear though if you are talking about him putting up the $85K- $130K in addition to the $65K pay off or are you needing to finance the remodeling? The scenario becomes much more complicated if you need outside financing for remodeling.
  • January 05 2013
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That isn't correct, there is no law of charging interest.  He simply could give you a loan on his own accord and charge or not charge interest, that is entirely up to him.  That is not constituted as a gift as it's a loan if you are paying him back.  If he would like to have his name on the title then you could simply do a quit claim deed after the fact and add his name.  There are many ways to go about it.  Talk to your Accountant about the best way for tax purposes that benefits the both of you.
  • January 05 2013
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Your father probably could justify an interest rate of 3 to 3.5%.  He should document the factors he used for the choice of interest rate by getting a few quotes or even checking the scrolling mortgage rates at the right (and keeping copies for the records).

He is correct, if he doesn't charge you market rate of interest he has to declare the difference between what he charges and markets rates as a gift and pay gift taxes.   He also must declare the interest as income on his income taxes.  He doesn't have to charge interest, but then he'd be liable for the gift taxes.  
  • January 05 2013
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