According to the National Association of Realtors 7 percent of first-time home buyers received a loan from a friend or relative in 2013 (for all or part of the loan amount.) By borrowing money from parents, both parents and children may end up with a good deal. The parents may get a better return on their investment and the child may get a similar or better interest rate as well as lower closing cost.
One downside to “parent financing” is that the parent is taking a risk – the child may loose his or her job and be unable to pay on the loan. The parent may feel hesitant to foreclose on their own children (and maybe grandchildren.) It may therefore be wise for parents to apply the same criteria as a bank would when qualifying their child for the loan. Also, loan documents should be prepared and recorded spelling out the terms and conditions of the loan.
To avoid extra taxes parents will want to structure the loan with a “market interest rate” and terms.
There are 3rd parties that will help manage a family loan. Companies like National Family Mortgage may help prevent IRS gift taxes and may also help protect your family relationship as a 3rd party is involved.
There may be other benefits to parent financing – you may be able to forgive a certain annual amount of the loan every year ($14,000 for 2014 depending upon your situation) to reduce inheritance taxes in the future. There are lifetime maximums that may apply as well.