Legal Question in Business Law in Massachusetts

Re: Legal contract between family members- can it be done?

The lender will not recognize the family member as the responsible party for the loan. If they do not make the payments the lender will look first to your home, foreclosing its mortgage, and then to you. You should have the family member enter into a loan agreement directly with you so at least there is some record of the family member's obligation to you. The indemnification suggested in the prior response is also a good idea. The bottom line is that if the family member does not make the payments, you will have to pay or lose your home. If that risk is not acceptable to you - do not enter into the arrangement.

Re: Legal contract between family members- can it be done?

I'm not fully clear on your objectives ... you ask

if a document can show that the home equity loan

is a personal loan. If you want the loan to be a

personal loan but not an equity loan, apply for that

instead; expect to pay a higher rate or possibly to

be turned down but not to endanger the home if you do

that.

Then you ask if somewhere it can be stated that

the obligor is the party responsible, but if YOU

are taking out the loan, then YOU are responsible,

and if you pledge your home as equity, then your

house is 'responsible' as well, if you can't make

the payments. If you want your relative to be

responsible, you bring your relative to the bank

and have them apply for the loan; if the relative

cannot get the loan by himself/herself, you can cosign

(which makes EACH of you 100% responsible) and if

your promise isn't enough, they'll ask you to pledge

the home as collateral, too, probably.

If you make the loan, nothing said between you and

your family member can take you off the hook if the

payments aren't made. If your home is pledged, likewise,

no side agreement with your family member can suddenly

be brought forward which relieves you of the obligation

and protects the house from being foreclosed; only solution

is actual payments.

You CAN ask for a loan with only his/her name on the loan and

with your home as collateral.

One suggestion: have the family member AND spouse

apply for a personal loan or line of credit -- well, see if they

can get it, anyway, before you use your home to bankroll

the venture.

Why do they need it? Is it to buy equipment of any value? Perhaps

they need a purchase money mortgage any may be able to get it from

the seller of the equipment.

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Re: Legal contract between family members- can it be done?

Other replies correctly state that the secondary borrower could be made a guarantor of the loan. However, this would not stop the bank from proceeding against your house if payments to the bank stop.

I would certainly suggest a formal promissory note from the secondary borrower, so at least you have documentary evidence of the loan.

You gain a tax benefit from the mortgage interest deduction on the equity loan; likewise, you are obliged to report any interest paid to you or to a third party on your behalf (i.e., the bank).

I hope that this transaction works for you -- it gets very awkward when a family member defaults on a loan....

Re: Legal contract between family members- can it be done?

Enforceable contracts can be made between family members. However, the lender (bank or finance company)does not and will not recognize your loan of the proceeds to the third party. If the relative can be a signatory on the loan or enter into a personal guarantee with you and/or the lender, perhaps this will give you some degree of protection. Even if the relative signs onto the debt for the home equity loan, you can and should have a separate agreement with them that covers the disability, death or divorce of each party and indemnification provisions.

I hope this information has been helpful to you. If I can be of further assistance, please call me at my toll-free numbner 877-413-9750. Good luck.