Borrowing from family has its risks
A number of surveys have indicated that many people don’t have adequate savings to cover a financial emergency. One, conducted by the National Foundation for Credit Counseling, found that 17 percent of Americans said if they needed $1,000 for an unplanned expense, they would have to borrow it from friends or family.
I’ve been asking readers to share their experiences with mixing family and finances. Following is one such story about a family financial fight that yet again proves what Shakespeare wrote in “Hamlet” — “Neither a borrower nor a lender be, for loan oft loses both itself and friend.”
The background: A young couple wanted to trade up to a more expensive home. But, as the woman’s mother wrote to me, “in order to be able to buy it, they had to show they could afford it by having a certain amount of money in the bank.”
I bet you can see where this is going. The parents were willing to help, but the lender required them to sign a “gift letter” that indicated the money was not a loan. “I had everyone mad at me because I did not want to sign it because it was a lie,” the mother wrote. “It was supposed to be paid back when the (other) house sold.”
As it turned out, the parents didn’t get back the $30,000 they had intended to lend the couple. “When I inquired, I was told that it was (the husband’s) money and that it was put in a mutual fund or some other fund,” the mother said.
The conflict gets more complicated: The couple divorce. The husband tells his former in-laws some convoluted tale about taking his ex-wife to court to change paperwork. “Then he threatened to turn us in for mortgage fraud. We had no idea that we had broken the law.”
The husband has remarried. “He is living extremely well with his new wife because they are living in the big fancy home while our daughter has to rent a smaller house,” the mother said. “If he would pay us back, we could help our daughter to be able to buy a home instead of renting. I just get so extremely angry and mad when I think about this. I wish there was something more I could do, but he said that if I took him to court, the judge would laugh me out of court.”
The parents are still holding out hope they’ll get their $30,000.
“It would take a miracle for us to get the money back and I know miracles happen because I have seen them. Any thoughts on this subject?”
The bottom line: I believe the mother when she says she and her husband didn’t truly comprehend that they were committing fraud when they signed the gift letter.
I’ve seen this happen before. A home buyer doesn’t have enough money for a down payment and/or closing costs and borrows it from a family member. They all agree the money is a loan, yet the family member signs a letter swearing that no repayment is expected or implied.
There’s a good reason for the letter, and signing it shouldn’t be seen as unimportant. The lender wants to be sure the down payment and/or closing costs aren’t coming from a loan because that would mean the buyers are deeper in debt than they otherwise would be. It messes with the debt-to-income ratios and could mean the buyers would have trouble paying the mortgage.
Unfortunately, the parents in this case don’t have the moral high ground. By signing the gift letter, they helped their daughter and her husband deceive a lender. They put themselves and the couple at risk legally.
Let’s say they hadn’t signed a gift letter. Yes, moral outrage would be appropriate. If they wanted the money back, they should have had a written loan agreement. However, even with such a document, don’t lend money that you need or want back. Ever.
Learn from this family fight. Yes, these loan deals with family and friends can work out. But when they don’t, things can become ugly. Relationships can forever be strained or severed. As this dispute played out over time, the former son-in-law threatened to keep his children from seeing their grandparents. The money is gone. They won’t get it back. Legally, they don’t have a right to it. If you’re in a similar situation, forget about the money. Move on with your life. It’s not worth the aggravation.
Michelle Singletary is a financial columnist for The Washington Post.