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For the purposes of this website, Friends & Family Loans are defined as a formalized loan from friends or family that uses a 3rd party to make the agreement binding. The 3rd party provides the legal and administrative services to manage the loan for a relatively small fee.
For the relatively few seniors that are fortunate enough to have friends or family with the financial resources to lend the significant amount of money required for elder care, this is a great option. The formal structure put in place by using 3rd party legal documents works well to make all parties feel comfortable with the process. There is freedom to structure the loan exactly as both parties would like. This includes the number of borrowers, the amount, interest rate and term. Therefore it can be designed appropriately for single and married seniors in good or poor health.
Friends and family loans are often thought of an as alternative to a reverse mortgage. A very significant difference is there are no restrictions that require a senior to reside in the home with a Family loan. For single seniors that are entering assisted living or skilled nursing, reverse mortgages are not an option and families usually have to sell the home. In a down real estate market, this might not be a desirable option.
For persons who are receiving or hope to receive financial assistance for elder care from the Veteran’s Administration or from their state Medicaid program, family or friend loans can represent a real risk. Unless the loan is structured correctly and documented in fine detail, it is possible the loan could be considered as income. If this is the case, then income-dependent programs may disqualify the candidate for having income in excess of the program’s limit. It is critically important that persons considering a loan from a family member or friend consult with an eldercare financial planning expert in advance of formalizing the loan.
Two organizations that offer assistance in the coordination of Friends and Family Loans are: