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I am looking to by a house real soon. I definitely want to avoid PMI and put down 20% which amounts to about $100K of initial payment. I have no debt whatsover (no credit card/student/car loans). I have been saving for last few years and currently have ~55K in my bank account. My elder brother has offered to loan me the remaining amount (he runs a great business and is doing well). My relations with him are pretty good, and I am certainly considering it. My wife just picked up a job and we will be saving aggressively in near future so looking to pay it back in a couple of years. My question is

a) what are the tax implications of this for him and me? Am I liable for paying a gift tax?

b) will this be a problem when applying for mortgage? I know lenders look at the trail of money in bank account so this will be questioned?

c) any other repercussions of doing this transaction that my ignorant soul is failing to comprehend?

Thanks in advance !!!

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    The giver pays the gift tax, not the recipient.
    – JohnFx ♦
    Commented Apr 10, 2015 at 1:43
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    Borrowing is a good way to wreck a relationship. Better to have him just give you some amount of money with no expectation of repayment; if that's a smaller amount, buy a smaller house. Better yet, buy a smaller house based on your real income/savings.
    – Steve Clay
    Commented Apr 10, 2015 at 12:26
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    b) Lenders don't like to see you borrowing from multiple sources. If your bank statements indicate that you don't have cash on hand to cover a $100k down payment, and you suddenly show up with a $100k down payment, they'll ask for documentation and a trail. This will usually result in your brother signing a form noting that this money is a gift and there's no expectation of repayment.
    – Noah
    Commented Apr 10, 2015 at 14:48

4 Answers 4

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a. Depends on whether it is a gift (no tax, but need to file gift tax form against his lifetime exclusion) or a loan (in which case he needs to charge fair market interest, which he can forgive as a gift with no gift tax form, but for which will need to pay tax on the forgiven income.

b. This is a definite possibility. Probably depends on the specific lender, but I would imagine this might be questioned, especially if there is an expectation of paying him back.

c. Relationships. I would always avoid mixing family and finances in this way. Do you want your family gatherings to be tainted by owing him money? What if you fall on hard times? What if you go on a nice vacation instead of paying him back faster?

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If the money is a gift the lender will make everybody acknowledge that the money is a gift. They will not care if the gift triggers tax forms for the giver. Signing the gift forms specifying it is a gift when it isn't a gift is fraud, and there are penalties attached to that.

If it is a loan that will not erase the PMI requirement. Because the lender for the main part of the mortgage will want to protect their investment.

Related to other impacts.

  • If it is a gift the relative can avoid the impact an their lifetime exemption by giving you a gift of 14K, your spouse a gift of 14K; their spouse can give you 14K, and your spouse a gift of 14K. Two married couples can give a gift of 56K in a single year.
  • If the gift is all or most of the down payment, some lenders frown on this because they want the borrower to have some of their skin in the game.
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(Can't find the delete button on the Android app -- Family Loans are worth investigating but I'm not sure they're applicable to this case.)

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a) He can loan you the money tax free he can even give you and your wife 29k a year tax free. Many people do a loan for lets say 100k and then they forgive the load 14.5k a year to avoid the taxes.

b) Yes when they see that deposit they will give you a hard time potentially. I got a hard time for my Real Estate tax refund.

c) Just putting stress on the family potentially.

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