Author Topic: Family Loan, Should I Spend Money for Legal Agreement?  (Read 2290 times)

fiddlefaddle

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Family Loan, Should I Spend Money for Legal Agreement?
« on: January 26, 2016, 12:43:34 PM »
I'm going through a divorce and am downsizing to a new house. My parents will be loaning me the money to buy the house. We plan to use the IRS minimum interest rate so that it won't be considered a gift and do everything above board. I'm the finance nerd of the family, so I'll be keeping up with the amortization, tax documents each year to report interest, etc. When my current "married" house sells, I'll be able to pay back about 1/3 of the loan.

The lawyer who's doing the closing will draw up official papers for the family loan for $500. Should I have him do that? Is it worth it? Is there a cheaper alternative, like drafting an agreement ourselves and getting it notarized, or is that risky in any way?

Background info that may be useful:
--lawyer will be preparing a free trader agreement so that ex-husband has no ownership in the new house; also, ex-husband is not malicious at all, so I have no worries about issues with him
--my relationship with my parents and sister is totally free of drama; we all get along; we all trust each other 100%; we don't foresee any issues stemming from this loan
--if there are drama issues with family, I can easily get a loan and repay parents once big house is sold

Thanks for any insight you can offer!

AlanStache

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Re: Family Loan, Should I Spend Money for Legal Agreement?
« Reply #1 on: January 26, 2016, 12:50:44 PM »
See:
http://forum.mrmoneymustache.com/antimustachian-wall-of-shame-and-comedy/inheritance-drama-you-got-any-stories-wanted/  Hope your family lives a 100 years longer but there are some really bad experiences in that thread.

I would very much be going for the 100% bullet proof Cover Your Ass option.

Axecleaver

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Re: Family Loan, Should I Spend Money for Legal Agreement?
« Reply #2 on: January 26, 2016, 01:03:59 PM »
I recently did a car loan for my sister in law. She has had some credit problems and the rates she was quoted were in the 12-15% range. I loaned her about 15k at 6%. We did this with a one page promissory note that defines the terms of the loan and repayment. I keep a spreadsheet of her amortization schedule and will claim the interest at the end of the year.

Is the $500 you were quoted include handling all the details of closing? If yes, that's a reasonable price. Closing costs about $500-1000 in legal here in NY, but our closings require the lawyers to do most of the actual work. If it's just for a promissory note, it seems excessive.

fiddlefaddle

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Re: Family Loan, Should I Spend Money for Legal Agreement?
« Reply #3 on: January 26, 2016, 01:11:42 PM »
AlanStache, I hear you on inheritance drama. That's one reason I asked the question.

I don't foresee drama, but I'm sure everyone says that! It's just me and my sister, so if something happened to my parents and she wanted money right away, I would just get a conventional loan. Still, it's definitely a scenario I need to think about.

Axecleaver, the $500 would be extra on top of the regular closing fees. I agree that it sounds excessive. That's why I was hoping to get lots of opinions that I can come up with a DIY option...

COlady

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Re: Family Loan, Should I Spend Money for Legal Agreement?
« Reply #4 on: January 26, 2016, 01:42:34 PM »
Will the house be collateral to the loan? Could be some tax implications for mortgage interest deduction that should look into....

Mrs. PoP

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Re: Family Loan, Should I Spend Money for Legal Agreement?
« Reply #5 on: January 26, 2016, 02:43:40 PM »
We used a legalzoom document when we borrowed from Mr PoP's parents to buy our rental property.  Did not record the document, but I believe a copy went with their wills in case anything should happen to them before the term of the loan (5yrs) was up and we needed to adjust inheritances to be fair. We reported interest paid on our taxes, and I believe they reported interest earned on theirs. 

ender

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Re: Family Loan, Should I Spend Money for Legal Agreement?
« Reply #6 on: January 26, 2016, 02:47:06 PM »
You could ask why it's so expensive and offer that if they dropped the price to $250 (or something you think is reasonable?) you'd definitely be interested.

Fuzz

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Re: Family Loan, Should I Spend Money for Legal Agreement?
« Reply #7 on: January 26, 2016, 05:23:08 PM »
I don't think that's a crazy price for a loan doc, but then I'm a lawyer. You could do it yourself and if nothing goes wrong, then you're fine. If something goes wrong, then you run into problems.

What's the size of the loan? Anything over 500K, I'd encourage you to do it. Anything under 150K, maybe not. In between is the gray area.

Also, a lawyer that regularly does divorces may not be the right lawyer for a promissory note. Those are different skill sets.