Using the family silver

SHAWN and Zuzana Landres were completing graduate degrees last year with the goal of working for nonprofit organizations when they did something that surprised even themselves.

They went home shopping.

Although most of their part-time income financed their educations -- his at UC Santa Barbara and hers at the University of Judaism -- the couple managed to snap up a three-bedroom, two-bath condominium in Westwood for more than $600,000. How'd they do that? Their mortgage was underwritten not by a financial institution but by family members.

Giving the younger generation a leg up in buying a home is a time-honored tradition for many families. According to a recent National Assn. of Realtors survey, 24% of first-time buyers receive a gift from a relative or friend to help with the down payment and another 6% receive a loan from a relative or friend.

Although recent low interest rates have enabled many first-time buyers to qualify for loans on their own with little or no money down, if interest rates continue to rise as anticipated and lenders tighten borrower requirements, the intergenerational loan could get a boost.

Financial experts caution, however, that not all parents should loan to their children. They could be putting their retirement income at risk.

If the loan is sealed with a handshake rather than written documents, there's a chance it might turn into a gift and create tensions among siblings. Loans improperly set up can cause borrowers who deduct interest payments to run afoul of the IRS. And should children default on an undocumented loan, parents may have little recourse to recover their money.

Still, those in the older generation who can afford to make a gift or a loan sometimes view it as a way of distributing some of their estate in advance so they can watch their children enjoy it.

"The point is, parents can give very-low-interest loans to their kids," said Asheesh Advani, president of CircleLending, the Waltham, Mass., company that formalized and administers the Landres' mortgage.

CircleLending, a pioneer in interpersonal loans, promotes "intra-family mortgages" as a low-cost way to keep wealth all in the family. The family loans can be used as a down payment, as a supplement to a down payment so the borrower can avoid paying private mortgage insurance, or to finance the entire mortgage at one to two percentage points lower than market interest rates, while providing parents with a stream of income competitive with conventional deposit rates.