Family Financial Matters

It seems too easy and hassle-free to ask a relative for a loan. But it’s that ease that makes it so dangerous too!

With plenty of inventory, low rates and first-time buyer incentives like an $8,000 tax credit, the time seems right for new homeowners to enter the market. But because the economy is suffering, prospective homebuyers don’t always have the down payment needed to purchase a new home. As a last resort, they look to their family to show their bank that they, indeed, can afford a new home.

And that, say experts, can lead to dire, far-reaching and long-term consequences.

“Borrowing money for a down payment on your house is a bad idea,” says Jerrold Mundis, author of “How to Get Out of Debt, Stay Out of Debt & Live Prosperously.” “If you have not been able to save enough for a down payment and need to borrow that as well to get a mortgage … then you really can’t afford that house and catastrophe is almost a certainty.”

A time-honored way of collecting cash for a down payment is to borrow from loved ones – loans that often must be classified as “gifts” so as not to appear on your credit report as an added expense. But borrowing in this manner can not only increase a potential homebuyer’s debt load, it can also strain relationships with family members.

Debra Yergen, a Yakima, Wash., financial communications consultant, suggests formalizing the process.

You can draw up an informal contract clearly stating the terms – when the money will be paid back, at what interest rate and under what conditions. She also suggests making the request, in lieu of birthday and holiday gifts, that friends and family donate every dollar they would spend on gifts into a “down payment” fund, to be combined with savings and allowed to grow until the desired amount is met.

Consulting with a financial-services company that focuses on managing loans between friends and family members is an option, though any close relationship can be strained when one party owes money to another.

Still, most experts agree that some sort of written contract needs to be in place when thousands of dollars are changing hands – even if it is between close personal friends, or even members of a close-knit family.

Mortgage rates around the country have dropped in recent months in attempts to breathe life into an ailing economy. The nation’s real-estate markets, officials recognize, must play a major role in any long-term economic recovery in the U.S.

A big part of that recovery is getting credit flowing freely again, but banks and mortgage companies, already burdened with a record number of foreclosures, are requiring higher credit scores and more sizable down payments in order to qualify for traditional mortgages.

That leaves would-be homeowners with few options – either find a way to come up with sizable percentage down payment, rent housing while attempting to squirrel away a few extra dollars each payday or, perhaps, move back home.

These days, there really is no “good” option for many of them – it’s often the least uncomfortable one that is chosen.

But starting on a path of financial dependence, regardless of the circumstances, is a choice that needs to be considered and reconsidered before being acted upon.

“If you have ever had trouble with debt or with making ends meet, then you shouldn’t be taking out unsecured loans in any amount from any source,” says Mundis. “Things will never get better so long as you continue to do that. You cannot borrow your way out of debt and into financial health any more than an alcoholic can drink himself sober.”

Adds Yergen: “Most people really want to help others, especially family members who they love. But measures need to be taken and terms outlined up front to ensure that families determined to share that love don’t lose it in the process.”

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