Loan Money to Your Brother?

[birdman2003]

My brother is looking to buy his first house.  He has $31k saved for a down payment with another $6k in cash as an emergency fund.  They are asking $194k.  He offered $191k if they pay all closing costs.  He wants me to loan him enough to get 20% down and avoid PMI.

He is getting married in November and his fiance will be relocating to live with him (she currently lives 500 miles away).  She doesn't have more than a couple thousand.  I asked him why he is so eager to buy a house (he's been living in his current apartment for 5 years).  I guess they are both complainy-pants about not wanting to move twice.  He apparently gave his landlord 60 days notice to end his rental agreement.  He has done a lot of shopping and doesn't want to live in a $150k house.

I have plenty of cash available but have never been in this situation before.  I'm thinking about offering a smaller amount ($4k?) that I would be comfortable walking away from in the event it took a long time to be repaid.

Any advice?

[DoubleDown]

I wouldn't do it unless you could honestly give the money away to him with absolutely no resentment (and this is in no way to suggest you should be this giving, because that kind of generosity is beyond just about everyone). If you loan him the money, no matter what amount, there's a very high likelihood he will not prioritize paying you back, and it will be a sore subject between you that can really strain or destroy the relationship.

I'd beg off, saying "I don't want money to come between us, I'm sorry." You could even follow with, "It's not you; I won't loan money to anyone close to me." If he acts offended or presses, I'd just keep repeating, "See, this is the kind of thing I'm talking about -- I don't want money to come between us, and you pressing me for it is demonstrating that. So how about those Washington Nationals?"

[Cheddar Stacker]

191,000 * 20% =  38,200
31,000 + 6,000 = 37,000

I guess he'll need to setup an escrow as well, but it seems to me the $4K would be enough. Saving $37K is nothing to sneeze at. It's not all out mustachian or anything, but he seems to be ok at saving indicating he could potentially repay it. But buying a house and getting married could change his ability to save.

If you're willing to lose it I say go for it. If you really want it back, set very clear expectations in writing and don't be afraid to make him stick to them. PMI would be $100+/month on a loan like that, so at least have him pay you $100/month to repay the loan.

[guitar_stitch]

The way I look at loans to family/close friends:  It's a gift.  If they are asking for money, it's likely you'll never see it back.

If you do get the money back, great.  However, consider how much his situation is about to change.  Moving, getting married...  He may have the best of intentions, but things change.

[frugaliknowit]

Do you know what percentage of your brother's income this represents (with or without PMI)?  You probably should.  If it's scary high (say over 30%), definitely don't do it... 

The fact that the fiance can't come up with any money is a bad sign for the couple's ability to save together and the likelihood of your getting paid should you loan them the money.  Do you know why she has nothing to throw in the kitty?

I agree that if you do this, be prepared to not be paid.  I think it is naive to think it won't stir resentment in the future.

If you force me to say "yes or no", I say "NO".

[Spork]

Firstly I agree with above...  If you really feel the need to do this, consider it a gift.

But more important -- I'm pretty sure legally IT MUST BE A GIFT.  I'm not a real estate professional or a lawyer... but I'm pretty sure they'll require him to sign something that says the down payment is not in any way a loan (and if he says it was a gift from you ... they'll likely make you sign as well.)

The whole point of the PMI (in the mind of the lender) is that "at this point they have enough skin in the game that they're not likely to walk."   

[Exflyboy]

hmm.. I been here before.

Generally I wouldn't do it, but my Wife of course has other ideas. Because of that we have loaned her Brother money, right up until the time he bounced a check on us.

No the answer is a flat "No" if he ever asked again.

I would say if this is a very small part of your net worth then to set up a strict repayment schedule.. This much on this date every month, consider charging him interest.

If he is ever late and/or does not pay all or part of the loan then he'll know better not to ask again.

Frank

[tweezers]

Firstly I agree with above...  If you really feel the need to do this, consider it a gift.

But more important -- I'm pretty sure legally IT MUST BE A GIFT.  I'm not a real estate professional or a lawyer... but I'm pretty sure they'll require him to sign something that says the down payment is not in any way a loan (and if he says it was a gift from you ... they'll likely make you sign as well.)

The whole point of the PMI (in the mind of the lender) is that "at this point they have enough skin in the game that they're not likely to walk."

This is true.  My mother in law lent us some money to purchase our house and she had to sign a document saying it was a gift and not a loan.  We still repaid her, but I suppose if we turned into a-holes and defaulted she'd have no legal recourse.  Obviously I've of the mindset and evidence of the fact that family loans can work, but you have to decide based on your own financial position and your brother's character.

[gimp]

I agree with other people. Make it a gift, not a loan. If he wants to repay the money, as he should, then that's good. If he doesn't, then from now on your money is all spoken for and you don't have any to spare.

[GizmoTX]

3 out of 4 siblings have never paid me back. Are they grateful? I don't think so. Never again.
It's a no-win situation. If a person is unable to get a bank loan, there's your answer. Give only what you are prepared to never see again.

[JeffC]

Why doesn't he just pay for the PMI while he needs it and then get rid of it when he gets past 20% paid off?

[Villanelle]

That fact that he's being a bit irrational about all this--refusing to move twice, refusing to look at cheaper homes, refusing to wait until he has more saved, and refusing to cut everything to the bone so he can save the additional money himself--would tell me all I need to know.  Nope. 

DH and I have a standard line.  "Sorry, all of our money is spoken for and we don't have an extra $X."  And that's true, because none of our money is "extra".

[AccidentalMiser]

PMI exists to cover the lender's extra risk.  Your brother wants YOU to accept this risk for the lender to save HIM some dollars.

No freakin' way unless you want to give him the money.  I would absolutely NOT do it.

[RichMoose]

I actually had a recent similar situation I can share. My sister, who I'm very close to, wanted to buy a car. She was always quite responsible with her money and by age 19 she had about $15k saved from working two jobs. She goes through a bad breakup shortly after that point and now has a new boyfriend. She and her current boyfriend have spent more than they earn since they got together about 1.5 years ago to the point where my sister accumulated $7k in credit card debt and blown through her savings. Although if you talk to boyfriend he earns $5- $10k a month through his business (strange how he's apparently rolling in it while my sister pays all the bills and is in debt but anyways...)

She wanted to buy a brand new Mitsubishi Lancer, but because she missed some payments in the past her interest rate on the car loan would be 8.5%. She asks me to co-sign the loan so it would be 1.9%. I nicely told her "No" and that I was struggling to pay my own debt (not really, but I do have a mortgage). I then told her that she needs to consider buying something much cheaper, economical, and cheaper to insure and then asked why she's getting rid of her own car. Her response "yeah but [boyfriend] needs a vehicle and he can't buy one right now". Again I tell her flatly "No" and that she shouldn't be buying a vehicle for boyfriend especially considering his infamously high income that I have to hear about every time he visits. At the end of the day what did she do? Bought the damn car, is paying ridiculous monthly payments and insurance fees, is going into debt even faster, and boyfriend drives it all the time like a moron accumulating tickets and the best part... she's now talking of breaking up because things aren't working out anymore.

Point of my story is I am so friggen glad I told her "No" because I would be eating the damn car if I agreed to co-sign. Your brother is probably better at managing his finances considering his downpayment, but I would never support my sibling who chooses to buy too much house because they don't want to move twice. If you can't afford it don't buy it, period. If you wouldn't gift him $4000 to blow in Vegas then don't "loan" it to him to purchase a house. If things go sideways between him and girlfriend or if they can't manage money together you'll regret your decision and maybe ruin your relationship.

[fartface]

I am VERY frugal...but if my brother (who clearly is responsible AND a saver like yours) asked me for $5K...I would loan it to him. Agree w/other posters who said you have to be 100% ok with not ever getting any of it back - unlikely as it is.

The ONLY time in my life I borrowed money from my parents was when I was 24. For the down payment on my first home b/c I too was about $5K short making it to 20% to avoid the PMI.

I paid my parents back fully within one year + interest.

I think you know the answer to your question. I think your brother has shown he is capable of paying this loan back based off his savings rate. I say go for it. I think you'll feel good helping him out.

[frugalecon]

One thing that would worry me is brother and fiancée depleting all of their $$ and some of yours to buy the house. That means they would have no emergency fund for the inevitable trials of life. Surely paying you would then not be a priority in the event of other trouble, and how would they handle that trouble?

Hopefully the lack of cash is not due to a need for a clownish wedding and destination bachelor/bachelorette parties.

[Prepube]

No need to think about this.  Never loan money to family (but give it freely, if you have it).  Period.

[HopetoFIRE]

I would not loan the money, no matter how much money he has been able to save so far.  There is a reason why banks came up with certain set of rules to make sure that someone can afford a loan.  If he has not saved enough for the down payment, he can't afford that particular house.  My parents ended lending my sister 1/2 of her down payment (>$20k).  They thought that it would be a good opportunity for them to invest in a home (don't know why they thought that given my sister's money management skills).  Well, my sister can barely afford to pay the mortgage each month due to different expenses that come up.  Guess my parent won't be getting any part of their investment back any time soon.  A lot of first time home buyers do not take into account upkeep costs of owning a home.  He may feel that he can afford the monthly mortgage payment now, but what if there is something he needs to replace or fixed and that eats into his monthly expenses?  Which payment he will forgo first?  Mostly likely yours.

[Davids]

Loans to family members is a tough one. If necessary give an amount you are comfortable giving where if you do not get paid back it won't run the relationship.

[Thegoblinchief]

He doesn't NEED this. So no. I wouldn't do it. The inability to wait suggests not enough maturity to be able to pay it back, or be able to manage the extra expenses of owning the house.

[former player]

He's your brother, so I'm assuming you've known him all your life and that you grew up with similar financial influences.  You should know whether the members of your family are responsible with money, and whether your brother's approach matches yours and your family's.  Which makes me wonder why you are asking for internet advice, and I wonder whether you are perhaps concerned about the fiancée who is coming from 500 miles away and "has only a couple of thousand".  Perhaps you do not (yet?) know her or like her well enough to want to help provide her with a home?  Or maybe that she will lead your brother into living up to or beyond his means?  Or that they are spending a lot of money on an extravagant wedding instead of putting it into their future home?  Only you can answer these questions.

Personally, if my brother asked me for a loan, I'd give it to him with very few questions asked.  But then, I've known and loved my brother for half a century, I know that he is honest, honourable and careful with money, would ask me for a loan only for a good reason, and would pay it back on schedule.  Pretty much all I'd want to know is whether I could help with more than money.  I certainly value my lifetime relationship with him more than I do a few thousand dollars.

So I think what you need to do is consider your relationship with your brother - which includes his future wife, as once he is married you will be having a relationship with them as a couple.  How you feel about that relationship will give you the answer whether to give or loan money, how much you might hand over, and what your expectations are about getting it back.

[GizmoTX]

I thought my sister was good with money. We loaned her quite a bit as a second mortgage. She made payments at first, then abruptly stopped. She was many states away, so we didn't know what was going on. Later on I discovered that her primary mortgage was set up as a balloon, interest only for the first several years. She literally bashed holes in the walls to "remodel", making the place unsellable. It eventually foreclosed, but not before the bank asked us to bail her out. At that point we were finished & so was our money. That was 20 years ago. Today she acts as if nothing happened. We're polite.

In my opinion, your relationship is NOT helped by lending money. If he gets & remains angry at you for not lending him any money, it's for sure that he would resent you if you did lend him any money. Not to mention how you'd feel if he didn't pay you back yet spent his money on everything else because he "needed" to.

[frugalecon]

Upon reflection, it seems that one way to approach it is to frame it as a choice between giving him $7k as a wedding present (is that about what he needs?) or telling him that you just can't swing it. If those were the alternatives, which would you choose?

[birdman2003]

I think between myself and his fiance, we convinced him to look for a less expensive house.  They accepted his offer but he got out of it after the home inspection showed some signs of a roof leak and other problems with a 90 year old house.

So for now I'm not going to loan or gift him anything.  Good responses, I appreciate them.

[MikeBear]

I only loan money to people I don't really like. That's because it guarantees I'll never see them again.