In-laws Offering to be the Bank, Should We Say Yes?

Hi Pete,

My husband and I are in our early 30s, we have a 1-year-old, no debt and we are saving appropriately (savings, retirement through work, investments). We have a 20% down payment for a house in the 200K range. However, my in-laws are quite well off and have offered to pay cash for a house for us. They would then draw up a contract where we would pay them back with 3% interest. We can put down whatever we want for a down payment and essentially upon their passing, the house would be paid off.

I can't decide if this is an opportunity to take advantage and buy a conservative dream home (max. 235K), or if I should come in under budget and try to have a mortgage that was below what we were paying in rent. Advice, please:)

Thank you,

Jessie

I’m confident a fair number of readers have dreamt about this very scenario being offered to them. Mom and dad have more money than they spend on a regular basis and want to help their kids out while they’re alive so they can see them enjoy their generosity. It sounds like a sweet deal. How could it possibly go wrong?

I’ll give you my thoughts on your specific situation in a minute, Jess, but I first want to explain why this offer needs to be approached with caution by anyone receiving it.

Getting into bed with family members (financially or otherwise) is generally considered… undesirable. There are all sorts of ways a deal struck with good intentions can wind up hurting feelings and potentially destroying families. That doesn’t even mean that the proposed deal doesn’t work out between the two interested parties, however. Many times, it does. Sometimes, though, a third party (a sibling, usually) doesn’t like the favor being extended to someone else. They then embark on a mission of self-righteous indignation which intensifies into a scorched earth campaign if they aren’t appeased. I’m not exaggerating, but oh, how I wish I was. Money and perceived favoritism can wreak havoc on a family, and it needs to be addressed before anyone agrees to anything. In fact, if you ask anyone that’s been in the financial services industry more than a minute and they’re sure to have a tale or two about family meltdowns that revolve around who is/isn’t getting what they feel they do/don’t “deserve”.

You shouldn’t underestimate the potential friction between both parties in the deal, either. Sometimes the lender feels emboldened to make suggestions about how the lendee should be managing different aspects of their life. Why? It could be a number of different reasons, but most of them distill down to the lender’s money and the lender wanting to control the situation so they get it back. Doesn’t that sound like fun? Occasionally, the lendee becomes distant with the lender because of their obligation to them and the stress it puts on their family. Why? A bank would have turned them down for the loan because they didn’t think they’d get repaid, but a family member doesn’t underwrite like a bank. When repayment gets difficult, the stress often manifests itself in distance and separation.

Additionally, sometimes a family member offers assistance when they really shouldn’t. Occasionally, parents want to be parents regardless of how old their kids are and make an offer they really can’t afford (paying for college, anyone?). The lender is seriously jeopardizing their future in order to assist the lendee. The offer is generous and reckless at the same time, and very rarely works out for the benefit of both parties. No son or daughter wants to have an epiphany while in line at Starbucks that the money they borrowed (and maybe didn’t repay in full) could be the reason their parents aren’t able to retire. Again, I wish I was joking.

With that huge warning out of the way and duly noted, let’s work on the situation at hand. Based on your description of the circumstances and the potential deal, I can imagine why you’re conflicted. By your account, you’re doing a fine job with your personal budget as you’ve accumulated in the neighborhood of $40,000 for a down payment on a home, you’re saving money both inside and outside of retirement plans, and have no debt to speak of. It doesn’t sound like you’d have any trouble qualifying for an excellent mortgage on your own if you decided to. You’ve done everything right to position yourself for the home-buying process.

But then… you’re thrown a curveball. You’re offered a too-good-to-be-true deal by in-laws that can presumably afford to help and your options suddenly expand. Now you have incredible financing and you can potentially afford even more house! Is it worth the stretch? You probably know the answer to this already (hint: reread the huge caveat).

No. No, it’s not. Especially if the stretch results in spending more on your monthly housing budget than you should (25%). You shouldn’t allow your good fortune in financing to potentially derail the rest of your budget and future financial achievements. Stick to the plan that’s gotten you to the position you’re in now and you won’t regret it. Buy or build the house you can comfortably afford, and don’t look back.

Should you finance with your in-laws? Eh… 100% disclosure, I’ve done it in the past and it worked out ok. But, I never felt comfortable with the fact that I owed my in-laws money. Similar to you, I could have borrowed the money from a bank without any problems. The in-laws wanted to help, however, and were tired of making a miserable return on their money in their savings account. We both looked at it as a way to help each other out. I know your situation is a little different as it sounds like your in-laws really don’t intend to be made whole unless they live to the end of the payment schedule. And to be honest, that’s the wrinkle that keeps tripping me up. Is it a loan? Is it a gift? A loan that turns into a gift? A combination?

In these situations, I think it’s important for me to acknowledge (again) that you’ve done a fabulous job of getting to where you are. You’ve most likely made some great decisions along the way. There’s no way, however, that I can know the attitudes and depth of relationships in this specific case, and that can go a long way in determining the direction you should go. My reply to you is: after reading this post, what do you think you should do?