Options for Family Member Private Loan in Colorado

[Brian Kraft]

I'm under contract on an investment property-- a duplex in Colorado and I'm trying to navigate the details of a partial private loan from my sister. I'm working with a mortgage broker I like that I've used in the past. He's suggested an approach which sounds good to me, but my sister, who is infamously indecisive, is starting to offer up alternate ideas--which she has yet to thoroughly understand, let alone communicate clearly to me about. So, I'm just asking here if you may have thoughts on the subject.

The proposed plan by the mortgage broker is 70% conventional loan and 30% down ("properties 5-10 for me and duplex" was explained to me for the reason for 30 vs 25% min down). The idea being that the 30% would be coming from my sister as secured funds--with a recorded note and deed, against one of my other properties. Because it's secured funds, the minimum term is 5 years. The plan I've been discussing with my sister is a cashout refi in 6 to 12 months post-closing (those details are still being figured out, based on a Credit Union's requirements). Even in the event I can't make her 100% whole with the cashout refi, I plan on taking out a HELOC for some improvements, which I plan to do with the equity in my primary, and there would be sufficient $ there to fill in any outstanding debt with my sister.

Her concern was the ambiguity of the 5 year term vs my intention of paying her back within a year, at most. She is looking for a more formal agreement that spells out *exactly* what she and I are agreeing to. She said she had taken a very quick look online and saw some other approach(es) that would including all the formalities, but could be structured for the quicker repayment. It certainly can't be in the form of a gift, but what other solutions are there we could utilize to structure things to get around the 5 year minimum? 

[Jon Holdman]

First, are you prepared to discuss this loan at every family get together until you die?  Especially if anything goes wrong?  That is a serious question.  And you should consider the possibility of this being a never ending barrier between you and your sister.  The question in your first post tells me you're well on the way to this happening.  

That said, do you really have a conventional lender signed up who will do this 70/30 arrangement?  That might be possible with a commercial lender.  But I'm skeptical a conventional lender will allow this if its fully disclosed.  And if its not disclosed, well, that's a different can of worms.  Even though the loan is secured against a different property, the lender will still have a form that asks "is any part of the down payment borrowed" and you need to answer honestly to avoid loan fraud.

Complete poppycock.  There may be something else involved here, but I've made and taken out loans here in CO that were secured with real estate with much shorter terms.  Like six or nine months.  If she wants a 12 month term, make it have a 12 month term.  The paperwork should absolutely reflect exactly what you're agreeing to.