Family Loan Agreement Mortgage

If you pay more than $15,000 to a parent, in order for the family money exchange to be considered a legitimate loan and not a reportable financial gift, you must both properly document the transaction and report interest at a rate that is at or above the minimum rate required by the federal government, called the applicable federal rate (AFR). Even if you document the loan, but report that you earn less than the corresponding AFR, the IRS may view interest as income and consider unpaid interest as a financial gift. A formal credit agreement protects you and your children. It increases the chances that you will get your money back if your child goes into family law proceedings or goes bankrupt. Whether you lend money to the family or lend money to the family, the loan usually needs to be mutually beneficial to both the borrower and the lender, in order to keep your family intact. Lenders, in particular, need to understand the alternatives, risks and tax effects of a family loan. Market rates usually need to be applied to what you lend or borrow for your family loan to be treated as a loan. If you`re making a zero-rate or lower-than-market low-rate loan, give a gift to Uncle Sam. The basic terms of a family credit agreement should be: Buying a home is the biggest transaction you`re likely to make in your life, and while it`s considered a “good” form of debt, it`s still a big commitment…