Chase has some competition. The Bank of Mom and Dad is now the seventh largest home loan lender in the United States. A recent study from Legal & General Group found that parents lent their kids a total of $47 billion in 2018, which helped buy 1.2 million homes. To put it another way: one in five parents helped fund the purchase of $317 billion worth of housing. Forty-three percent of those who received the help were under 35.
For a number of economic reasons — student loan debt, stagnant wages, sky-high rents, the extreme cost of day care, and other such services — it’s not a surprise that more and more millennials are turning to mom and dad to help fund their future. After all, their APR is probably pretty low, too. And, for the most part, if able, parents seem to be fine with fronting some money. But even if all parties involved are okay with the arrangement, money changing hands can change relationships. Guilt and shame are often prevalent. Plus, questions linger: What is the plan to pay back the loan? Is the gift just a way for parents to keep you under their wing? Is your spouse okay with accepting such a large gift? What will happen if things go south in your marriage? Will the money be used as leverage later?
The truth is that, even if your parents are ready and willing, it can be difficult asking anyone for money to buy a home or subsidize some other cost. To help guide you through the discussion, we spoke to several legal, financial, and relationship experts to help deal with any exchange of funds coming from the bank of mom and dad.
Set The Terms Up Front
Loans from parents and in-laws can become tricky when unestablished expectations don’t match reality. Maybe those who accepted the money are slow in paying the loan back but are still going out to dinner and away for vacations. Maybe mom and dad won’t stop asking when you’ll get them their money back. To keep such scenarios — and many, many more from happening — the transaction needs to be handled like a business decision and all parties need to spell out the terms of the loan out of the gate.
“If it’s important to you that it is considered a loan versus a gift, make sure that’s communicated that each person understands that via writing or at very least verbally,” says Carrie Krawiec, a licensed marriage and family therapist. Even with the terms laid out, understand that personal feelings will still arise and complicate things. “Assume problems and over communicate ahead of time if you can,” says Amanda Clayman, a financial wellness advocate for Prudential. “During the time that the loan is ‘open,’ try to withhold judgment and believe the best — for your own peace of mind.”
It’s also important that everyone be on the same page and that personalities are taken into account before any money changes hands. Make sure it’s understood what the boundaries are when it comes to other family members. Is it a close-knit family? If so, then there’s a good chance that your or your spouse’s siblings might get wind of the deal. “Predict as many problems as you can and try to identify potential solutions,” says Krawiec. “You won’t get them all but it will be a start.”
Understand Everyone’s Involvement
As parents, when you lend your child and his or her spouse money, it’s going to create some hurt feelings among other kids. And, it could also put them in an awkward position regarding your estate. As potential legatees of your estate, it could fall to them to reclaim the loan if something should happen to you before it’s repaid. “It puts them in a really nasty position,” says David N. Pessin, a wealth preservation attorney at Pessin Katz Law. “It puts them in a position of being the police down the line and that’s not really fair. You don’t to be the instrument of creating conflict. Kids have enough conflicts without, you creating one.” So it’s a matter of talking to everyone and managing every angle of the exchange.
Be Honest About Your Feelings
No matter how transparent you are up front, there could be resentment on both sides. If parents are frugal, they might feel frustrated that the kids don’t share their fiscal values and now require a loan. On the other side, kids who find themselves in dire straits might be jealous of their parents’ financial stability. If those feelings arise, it’s important to confront them ahead of any transaction. Now, of course, his requires tact. But things will only get worse if such feelings fester.
Have Uncomfortable Discussions
Hypothetical situation: Your parents lend you and your wife money for a down payment. A few years later circumstances change and you file for divorce. Now what happens? “How is that going to be addressed?” asks Pessin. “Is she going to say, ‘I didn’t borrow any money, your son did. And I’m not married to him anymore, so I’m not paying anything.’ Even though she did wind up with half the house that the money was lent for?” It’s important to establish up front who exactly the money is being lent to, what is being used for, and what will happen in the case of any ugly possible outcomes.
Divorce isn’t the only hardship you might encounter when dealing with an inter-family loan. What if a parent dies before the loan is paid back? What if a parent needs to be hospitalized or sent to a nursing home and needs the money earlier than you’d planned to pay it back? What if, as the parent, you’re concerned about the kids’ ability to pay it back on time, or at all? Such conversations need to take place before any money changes hands, even if it’s uncomfortable.
“People don’t like to talk about unpleasant things,” says Pessin. “But they have to. You have to be honest with yourself and not just have a knee-jerk reaction because you need money and dad has it. All parties involved need to ask themselves, ‘Is this really the best option?’”
Have the Discussion in Private
It’s easy for conversations about money to come up over the phone or at a family brunch. But when they move past a casual hypothetical and into a more serious discussion, there needs to be a more business-like setting to ensure all the details are ironed out. Krawiec noted that it’s important to have them at a set time and in private, which also helps avoid any passive aggressive comments or more serious issues that might be brought up in a public setting.
Bring in a Third Party
There are a lot of emotions tied up in an inter-family loan. For all of the business elements that are tied into this money exchange, when all is said and done, this is still a family matter. And that comes with i’s fair share of other feelings. If that’s the case, Pessin recommends seeing a counselor ahead of time and putting everything out there. “If there are really bad feelings,” Pessin says, “uncomfortable things that need to be said, go to a family therapist, sit down and have a frank discussion. They can help you to unearth the things that will allow you to move forward with the legal stuff.”