Jason and Mia are in their early 20s and have been married for three years. They are eager to purchase their first house, but they do not have sufficient money for a down payment. Mia’s Uncle Chris has agreed to loan them the money to purchase a small house. Uncle Chris requests a personal balance sheet and cash flow statement as well as tax returns for the last two years to verify their income and their ability to make monthly payments.
For the past two years, Chris has been working substantial overtime, which has increased his income by over 25 percent. The cash flow statements for the last two years show that Mia and Jason will have no difficulty making the payments Uncle Chris requires. However, Jason’s company has informed their employees that the overtime will not continue in the coming year. Mia and Jason are concerned that if they prepare their personal cash flow statement based on Jason’s base salary that Uncle Chris will not loan them the money because it will show the loan payments can only be made with very strict cost cutting and financial discipline. Therefore they elect to present just what Uncle Chris requested, which are the last two years’ personal cash flow statements and tax returns. They decide not to provide any additional information unless he asks.
a. Comment on Mia and Jason’s decision not to provide the information underlying their cash flow statement. What potential problems could result from their decision?
b. Discuss in general the disadvantages of borrowing money from relatives.