Personal Loan for Family Member

[thomasjade]

(California) I've been approached by a family member for a personal loan. The personal loan is to be used toward a down payment for a rental property, which requires 25% down. In Jan 09' the ARM on their primary loan will reset making the payment unaffordable. The objective is to close on the rental property and then walk away from the primary residence. I am hesitate to provide the personal loan. I want to ensure that what is being down is legal and that the lender of the primary loan can not go after the rental property. Please advise.

What options exist if someone had not choice but to foreclose on their home, but wanted to ensure that they could purchase more affordable home?

[Zigner]

Why would you even CONSIDER loaning money to anybody that is willing to just "walk away" from a current loan they have?

[thomasjade]

Good point.

However given the circumstances, the family member is my sister who has 2 daughters, 7 and 4 years old. She is has a stable job, Registered Nurse, for the past 7 years. Her husband is an former police officer, now worker on his own delivery service business. Like many others they made very poor financial choices in the past couple of years, taking equity out of their homes and putting them in very bad investments. I am most concerned about my neices not having a place of their own come Jan 09'.

My sister claims she has done her research on that this is the option that she had. I on the other hand want to have 2nd, 3rd, and 4th opinions because my greatest fear is that I loan her the money, and it turns out that the lender can go after her for the other property.

Any legal advice is much appreciated.

[Zigner]

Originally Posted by thomasjade

Good point.

However given the circumstances, the family member is my sister who has 2 daughters, 7 and 4 years old. She is has a stable job, Registered Nurse, for the past 7 years. Her husband is an former police officer, now worker on his own delivery service business. Like many others they made very poor financial choices in the past couple of years, taking equity out of their homes and putting them in very bad investments. I am most concerned about my neices not having a place of their own come Jan 09'.

My sister claims she has done her research on that this is the option that she had. I on the other hand want to have 2nd, 3rd, and 4th opinions because my greatest fear is that I loan her the money, and it turns out that the lender can go after her for the other property.

Any legal advice is much appreciated.

Ok, let me state it a bit more clearly for you:
Your sister is willing to "walk away" from a secured loan. What makes you think she won't walk away from an unsecured loan?
If you want to help the nieces and don't want to have problem, GIVE the money to her. Personally, I NEVER loan money to friends/family. I GIVE it to them and, if they return it, that's a bonus!

[VeronicaLodge]

me too zig.

what is wrong with them renting something? why do they have to buy another home when they just walk away from one home obligation?

i think the other mortgagor can come after them, get a judgment and then go after any assets and the new house will definitely be an asset.

[thomasjade]

me to veronica.

you bring up a good point of about renting.

their current mortgage on the primary is 4k+. the price of the 2nd is 170k, requires 25% down, works out to be around 750-800/mnth. this is a 4 bedroom home, 1999, in a decent neigborhood. i highly doubt that they could find a 4 bedroom rental for that price. either way, it seems like they are going to walk away from their primary loan so credit of course will be bad for next 7-10 years. thought quite shady, i can understand the concept of what they are attempting to do.

the reason why i am posting all of this info is to find out if the lender of the primary residence can go after the 2nd property. i spoke with a friend in the mortgage business and he states that they can not. it's the very reason why lenders/banks are in so much trouble right now - all of the defaults on the loans. however he did suggest that i place a lean / trustee on the 2nd to protect me from them defaulting on their personal loan to me.

yeah, i don't know - when it comes to family it gets pretty sticky...

thanks for the feedback!

[VeronicaLodge]

did you friend say why the bank couldnt go after their other assets (the other house)?

if you have the money and are so inclined, you could purchase the "investment" house in your name and then rent it to them.?

[thomasjade]

good question. my friend didn't say why the lender of the primary couldn't go after the 2nd. the plot does thicken.

i spoke with my accountant and he stated that there may be a potential tax problem. if my sister had taken equity out of the house, which she did, then if she forecloses, the difference between what the banks sells it for and the deficiency could be considered income and is taxable by the IRS, unless of bankruptcy or insolvency. BUT he did also say that the primary lender is generally not going after 2nd or additional assets. almost a coin flip i guess, but since the lenders have so many problems as it is, i think they just want to hurry up and sell the properties.

after discussing this with a mortgage broker, an accountant, and some additional research on the internet i've come to the conclusion that i myself better tread lightly in these difficult economic times and never get myself into her situation, what a mess. i definitely don't feel anymore comfortable about loaning her the money then i did at the start of the day.

thanks for the feedback!

[dmiller12]

"Never a lender nor a borrower be" That goes double for family members. Trust me. I learned the hard way.

[LindaP777]

Originally Posted by VeronicaLodge

if you have the money and are so inclined, you could purchase the "investment" house in your name and then rent it to them.?

This seems like a better solution to protect you.
I wouldn't trust a liar or a cheater (let's face it, your sister agreed to a legally binding contract and is now thumbing her nose at the agreement and looking for ways to get out of it). If they 'walked' once with ease, they'll do it again.

Get the house in your name. You can agree to do an "owner finance" type of rental situation, if you feel you wnat to do something helpful. Then, if they stop making the payments, you evict them and sell. Would you have the guts to evict them if they stopped making the payments?

[thomasjade]

thanks for all of the feedback!

i'm the oldest in the family of 6 six, so i'm not afraid to kick some ass but i think it's better not to put myself in that situation where i may have to evict my own family member.

i had a long conversation with my sister last night and i think i got through to her. "if you can't afford it, don't buy it!!!" "set up a strict budget, pay off credit cards, sell your bmw and mercedes!!!" yes, i know - what a mess.

but at least i don't have to be involved. when it comes to hard earned money, i will think twice before handing it over to some one else, family or not.

i hope she learns her lesson.

[dmiller12]

sell your bmw and mercedes!!!" yes, i know - what a mess

AH YAAAAHHHH!!!

I am most concerned about my neices not having a place of their own come Jan 09'.

Time for your sister to start being more concerned about her daughters and less concerned about her image. Your nieces will get through the tough times and they'll be better for it. So will your sister & brother-in-law.

[LindaP777]

Originally Posted by thomasjade

sell your bmw and mercedes!!!"

I just spewed coffee all over my flat screen!!!

[dmiller12]

I just spewed coffee all over my flat screen!!!

That's a riot!! I would've done the same thing if I had had coffee in my mouth. I honestly think I started choking on my own spit.

[VeronicaLodge]

lol i did too!