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Long story short:
My husband and I just came into a lot of money and decided to pay off my stepdaughter's student loans ($150,000). For tax purposes, instead of paying the loan off directly in one lump sum, we are writing checks to her and her husband with clear instructions that when the checks clear, they were to immediately wire the money to the loan company. At the exact same time, these kids decided they NEEDED to buy their first home immediately. They both graduated from college about 7 months ago and have only been employed for about 4 months. They cashed the checks, but didn't pay the loans off. My extremely intelilgent husband keeps crowing about how much money they've saved up, as if he can't do the arithmetic that their "savings" far outstrips their income over the past four months. They are clearly using the loan money to qualify for a mortgage, and my stepdaughter accidentally admitted that she's only used $20,000 of the $112,000 we gave them for loan payments.
Of course, we got forms from the broker that we need to sign, attesting that the gift checks we wrote them are not a loan, that we never expect them to pay us back the money. We don't, but we DO expect them to pay the money to someone else. I feel this is a matter of semantics; the money is owed to SOMEONE, just not to us.
The broker is well aware that the $80,000 they are have in their checking account is our money, to be used for student loans. She doesn't care. When I called her specifically to tell her I have misgivings about this, she said that the underwriters don't care if the money is owed someone, just that it's not owed to us. I can't imagine that's true.
In addition, my stepdaughter told us that the broker told them not to pay the money to the student loan servicer, to keep it in their account until the mortgage process is complete. That may or may not be true; she can be quite the storyteller when she wants something.
I feel that this entire situation is completely unethical. Am I crazy?
Welcome to the forums!
I'm not an expert, but it's slighly unethical at least the part of keeping the money in the account (asset reserve) until after closing if the intention is to simply spend it anyway.
As for the underwriters, no they really don't care: if the downpayment requirements are met along with the DTI / credit score guidelines including the student loan balance to where they can successfully underwrite the loan, they'll do so. Money made for broker and/or bank, nothing unethical there.
As for the arrangement between you and your stepdaughter, well it's never a stunt I'd pull with my dad in a similar situation. I absolutely would have the conversation with my own parent if he'd gifted me money for a specific purpose and then I wanted to use it towards something else... and if he vehemently disagreed with my decision, I'd go back to plan A, but that's me. Personally I do consider that to be an ethical issue but it's all in the family.
My opinion as a theoretical parent, I'm an unabashed fan of home ownership, and if I had children and one of them had this choice (assuming the student loans weren't at some absurd interest rate, which they likely aren't in this day and age) I'd allow them to buy the house instead of paying down the SL debt. That's me personally as I think it's a better use of near-term money; however, some would likely argue differently.
I'd choose being student loan free over two houses, LOL!
She should really think thrice.
@Revelate wrote:Welcome to the forums!
I'm not an expert, but it's slighly unethical at least the part of keeping the money in the account (asset reserve) until after closing if the intention is to simply spend it anyway.
...
My opinion as a theoretical parent, I'm an unabashed fan of home ownership, and if I had children and one of them had this choice (assuming the student loans weren't at some absurd interest rate, which they likely aren't in this day and age) I'd allow them to buy the house instead of paying down the SL debt. That's me personally as I think it's a better use of near-term money; however, some would likely argue differently.
Thank you for your reply. The weird thing is, my stepdaughter and her husband make 6 figures between them, and could very likely qualify for the mortgage on their own (they have a great credit score because they are very responsible with paying their bills on time - yay!). I am very much in favor of them becoming homeowners, if they can afford it. However, if they get into financial trouble (which they likely will, since my SD has a very shoddy employment record and will likely quit this job, too, as soon as she can), my husband and I will end up paying their mortgage, probably forever. Then, in however many years when the balance on the student loans comes due, we'll have to pay that, too. If they have to wait a couple of months to save their own down payment, I feel that's a much better way to show them the concept of work and reward.
However, my personal opinions on their financial future aside, I'm surprised that it doesn't trouble you more that I'm being asked to sign a testament that money was given free and clear, when it clearly wasn't. Maybe I'm overreacting after all.
@DaveSignal wrote:
It sounds like something you should talk to your daughters about. When are they planning on paying the loans? This was your gift to them so that they wouldn't have to pay the education loans later?
Yes, it was our gift to her so that she wouldn't have to pay them later. We wanted to pay for her education and couldn't afford to pay the tuition at the time, so she took out loans, but now we can.
@questionaskersmith wrote:
However, my personal opinions on their financial future aside, I'm surprised that it doesn't trouble you more that I'm being asked to sign a testament that money was given free and clear, when it clearly wasn't. Maybe I'm overreacting after all.
It really depends on what you're considering "free and clear." The bank has a very specific definition - is there an expectation or agreement that the money will be paid back to the originator? If the answer is no, the bank considers it a gift and their interest stops there. The bank is qualifying them for this mortgage with the student loan payments included. If they clear underwriting, that means that the bank is confident enough to say that given their total financial picture (the payments from you, however they are used, the student loan debt, any other debts, etc), they can pay this mortgage back.
Take another scenario - I've been saving money, but wind up buying a house through USDA and need to bring very little money to the table to close. I close, yay! Now I have this cash sitting around, and I decide that I would rather pay off my car loan and use that payment money to build up reserves to do maintenance/repairs down the road. The bank counted my original savings as my reserves, and they also factored that car payment into my home loan application. Anything unethical there? No. Stupid? Maybe, especially if my furnace goes out two weeks later.
The issue here is between you and your stepdaughter - and it's a very real one that you two will have to decide together how to deal with. I would sit down with them and do your best to help them make good decisions about how to spend that money, how much to spend on a home and when to buy it.
Did you give the money - yes
Do you expect them to pay you back - no
this is a gift even if it was earmarked for a speific item
That part is between you and the kids - and has nothing to do with the bank
In the banks eyes that money is there for whatever - it makes their file look stronger
probably not what you want to hear from a stranger on a forum but you do realize you are enabling them.
If you ever make a mortgage payment for them they will never learn the realities of finance - just that Mum and Pops will baile me out
I would draw a line in the sand
1- pay off the student loans as expected
2- They make 100k plus a year - pay your own bills
You got her through school and have even given money to pay for the student loans
Cut the string or they will use you until you have nothing left to give...........
Good Luck with the situation - ethically the bank is not in the wrong but the kids are
Brian
My take is this: you made a conditional gift to your step daughter and her husband. The gift was to be used to pay off student loan debt, not to buy a house.
I agree with the others in that the banks interest is only if the funds are to be repaid or not. Did you and your step daughter ever discuss what would happen if the funds were used for some other purpose? If not, it is time to do so.
If it were me, I would not be in a hurry to sign the gift funds letter. Based on your post, it is possible that your step daughter and her husband may use that form as rationale for not paying off the student loan debt. JMO.
questionaskersmith,
Did you post-date all of the checks and send them ALL to her at once? What is Dad's preferrance how the money should be used? Ultimately, you should be in agreement.
I personally think it was incredibly generous of you and hubby to gift her the money to pay off her loans. She should have been forever grateful for that. However, with a 6-figure income between them, in the near future, they could well get their own mortgage on their own merits, and not have the student loans hanging over their heads - if they were smart, they would be thinking about that.
That said, you have no gaurantee they will pay the student loans off on their own, plus a new mortgage - they could be setting themselves up for financial hardship along the way, particularly regarding their credit or defaulting on the student loans -how responsible do the two of them together seem to be?
Whatever you decide, I wouldn't be so giving in the future, otherwise, they will never learn how to make it on their own. If you choose to allow them to use the money for a mortgage, I would stipulate that you will not be open to paying one dime on her student loans, it's one or the other. Give THEM the ultimatum, it's one or the other, get them to think about the potential consequences, or, the pros and cons of either option.
Another option could be the stipulation, half for the mortgage, half for the student loans and let them figure out the rest.