FAMILY BAILOUT PLAN – GOOD OR BAD IDEA?

By
Real Estate Agent with Sharp Realty CalDRE #01045089

Record numbers of home owners in East Contra Costa County, as well as the country, are struggling to make their monthly mortgage payments with most of them owing more than their homes are currently worth.  Many of them are on the brink of not being able to make their payments and fall into the foreclosure process.  I've had several owners ask me if they should ask relatives to help bail them out of their predicament. 

In most cases, the answer is no.  In most cases owners would be throwing good money after bad and feeling even worse because now they owe money to their family members as well as the bank.  The bottom line is that if a relative's loan only postpones the inevitable loss of the home, they should not ask for or accept generous Rowing up Streambailout offers.  The owner is not only going to lose the home, but feel horrible for accepting money from relatives that they cannot repay. 

Owners in this situation must honestly evaluate why they're in the situation of not being able to afford their homes.  For most people stuck in this situation, it is because they borrowed more than they should have using low adjustable rate loans.  With interest rates adjusting upwards, their payments have increased from uncomfortable to unmanageable.  If accepting a loan or gift from a family member does not eliminate the cause of the problem, the owners are likely to find themselves in the same situation once the borrowed amount is spent.

There are a few cases where, in my opinion, it actually does make sense to accept an offer of financial assistance from family members.  If the owners are in this situation due to a temporary set-back, such as a loss of job, medical expenses, etc, then it would be logical to accept the loan as a ‘bridge' solution until the owners get back on their feet financially and can resume making their house payments and pay back the borrowed funds.

Another case where borrowing money makes sense is when owners who have equity in their homes, but cannot afford the monthly payments and are at risk of losing the home in foreclosure.  If they sell their home, they'll walk away with cash and save their credit scores.  Before borrowing the funds, get a reality check from a trusted real estate agent on how much the home would sell for and how much would be netted after sales expenses and existing liens against the home.  If the sale nets enough to repay the borrowed money and have cash left over, then it makes sense to borrow the money, keep the home from being foreclosed on, then sell the home. 

Lastly, if you have an obscenely rich relative who will never need the money back and can really bail you out with a large sum of money, (enough that you can payoff your loan sufficiently to be able to afford a new lower payment) then go for it and be thankful.

As a final comment, regardless of the home owners reason for the predicament and believe they'll be able to recover, it is never wise to borrow a family member's money if it is going to create a financial hardship on the kind relative. 

Comments (0)