Mixing relatives and money often forces lenders to forgive or foreclose.
Question: My recently divorced brother has asked to borrow $85,000 so he can buy a townhouse that's in foreclosure. It's an all-cash deal and Matt would be putting in $240,000 of his own money. He's offered my husband and me 5% interest on a 15-year first mortgage. While we want to help Matt out, we're a little worried that he can't afford this place. He says he needs it so his son and daughter can each have their own room when they stay with him. What should we do?
Answer: What? They don't have three-bedroom apartments where Matt lives? Seriously, it's not as if your brother needs to ransom his children from Somali pirates or pay for medical treatments not covered by his insurance. It's not, in short, as if he's facing an emergency here. So unless you've left something out--say, that Matt once lent you a lot of money--you are under no obligation to make this loan. Indeed, if buying the townhouse would put your brother in the hole, the right thing to do is to discourage him.
Let's say, though, that Matt persuades you he can afford it, and you and your husband continue to want to help. Before going any further, you need ask yourselves this: What will you do if you lend your brother the money and he fails to repay you? Are you prepared to have your loan turn into a gift? Or, alternatively, are you prepared to take possession of the townhouse if Matt defaults on the note?
If you're not willing to either walk away from your 85 grand or foreclose on your brother, you shouldn't lend him the dough. Why? Because no matter how good Matt's heart is, there's always a chance he'll fall behind on his payments (he could, for example, lose his job). If that happens, you can play the amend-extend-and-pretend game with the mortgage for a while. But ultimately your options are likely to boil down to forgiveness or foreclosure.
Sound harsh? Research shows that more than 40% of Americans were not repaid in full for the largest loan they ever made to friends or relatives, and more than 25% never got a cent back from their largest loan. So in deciding whether to lend Matt the money, you need to assume there's a reasonable probability he won't pay you back.
If you can live with that happening, go ahead and help him out. But if you can't, there's no reason why Matt can't rent an apartment large enough to accommodate his kids until he finds a home he can comfortably finance and a bank that's willing to take the risk associated with helping him buy it.
Got a question about money and family--or anything else? Write the authors atFlemingandSchwarz@MoneyandEthics.net.