It is permissible for you to lend this family what they need of money to renovate their home, then take that from zakaah because you are lending it to them and they will be in debt, and it is well known that the debtor is among the groups of people who are entitled to zakaah, and it is not essential that the zakaah be given to them, rather it is permissible to give the money to the lender directly.
This applies if it is clearly and unambiguously identified as a loan. The same applies if you give the money to them for the purpose of reconciliation and so as to stop the dispute, and you intend to get it back from those who give zakaah.
Shaykh Ibn ‘Uthaymeen (may Allaah have mercy on him) preferred a third way, which is that it is permissible to give the money to the one who is entitled to it -- even if there is no dispute -- with the intention of giving zakaah on behalf of a rich person. If the rich person agrees to that and allows it, then it will be counted as part of his zakaah.
These three ways are all permissible in your case: giving an unambiguous loan, giving it to them so as to reconcile between people with the intention of getting it back from those who give zakaah, and giving them the zakaah of so-and-so, someone who you know has money to give as zakaah, then telling him about it and asking his consent.
It says in Khashshaaf al-Qinaa’ (2/283): if a person who has zakaah gives it to the lender to pay the debt of the debtor without the permission of the poor person who is in debt, it is sound and valid, because he has given zakaah to pay off the debts of the debtor. This is similar to giving it to him to pay off his debts with it. End quote.
Shaykh Ibn ‘Uthaymeen (Allaah have mercy on him) said: Reconciling between people -- if there is enmity and trouble between one group and another, then another person comes and reconciles between them, but reconciliation may not be possible except by giving money, so he says: I make a commitment to give each one of you 10,000 riyals provided that you reconcile, and they agree to that. So this man may be given zakaah in the amount that he would have spent on reconciliation, so he may be given 20,000.
But if the poor person pays it off himself from his own money, then he should not be given zakaah, because if he pays it off from his own money then he is not a debtor and is not in debt now.
But this matter is subject to further discussion and it may be said that he can be given zakaah in two cases:
1.If he did not pay off the debt from his own money. In this case he is still in debt and it is essential to relieve him.
2.If he paid it off from his own money with the intention of getting it back from those who pay zakaah, so as not to close the door to reconciliation. Allaah says (interpretation of the meaning): “There is no good in most of their secret talks save (in) him who orders Sadaqah (charity in Allaah’s Cause), or Ma‘roof (Islamic Monotheism and all the good and righteous deeds which Allaah has ordained), or conciliation between mankind” [al-Nisa’ 4:114]. And because the situation may dictate that payment be made immediately. End quote from al-Sharh al-Mumti’ (6/233).
He also said: scholars said that this applies to everyone who pays an obligatory debt on behalf of someone else. He may collect it, even without the permission (of the debtor), unless the debt is of the type where the intention of the debtor is stipulated, in which case he can only do that with permission, as in the case of zakaah and expiation, because the one who has to pay the zakaah did not intend that and did not ask anyone to do it on his behalf.
An example of that is where a man comes and says: I am going to join the mujaahideen, give me some zakaah money, and I know that my friend has a lot of zakaah to be paid. So I gave this man 30,000 on the basis that it is my friend’s zakaah -- can I get it back? The answer is no, because the intention is essential in the case of zakaah, and in this case the one who owes zakaah did not have that intention. But the 30,000 is not wasted; rather there is great reward with Allaah for it and it will be charity on the part of the one who gave it.
If I tell him about that and say: I gave zakaah on your behalf, and he says: May Allaah reward you with good, I give my consent for that, then according to the madhhab this does not count as zakaah, because the intention was not there at the time when it was paid. But the correct view is that this is permissible, and the evidence for that is the hadeeth of Abu Hurayrah (may Allaah be pleased with him) and the story about his guarding the dates, when the Messenger (blessings and peace of Allaah be upon him) appointed him to guard the sadaqat al-fitr, and the Shaytaan came to him one night and took some of the dates. Abu Hurayrah grabbed him and the Shaytaan said that he was poor and had a family, so Abu Hurayrah felt sorry for him and let him go. This happened again on the second night, and on the third night he said: “You have to go to the Messenger (blessings and peace of Allaah be upon him.” He was afraid of the Messenger (blessings and peace of Allaah be upon him) and said: “I will tell you of a verse, that if you recite it at night you will have a guardian with you from Allaah and no devil will come near you until morning.” And he taught him Aayat al-Kurisy. The following morning, the Messenger (blessings and peace of Allaah be upon him) said to him: “What happened to your prisoner last night?” And he said: “He told you the truth even though he is a liar.” And he said: “Do you know who you have been talking to for the last three nights?” He said No.” He said: “That was a devil.”
Abu Hurayrah (may Allaah be pleased with him), when he gave some of that zakaah, did not give it with the permission of the Messenger, but the Messenger (blessings and peace of Allaah be upon him) allowed it.
So the correct view is that if a person gives zakaah on behalf of another person, and that person allows it, then the correct view is that it is valid and permissible. End quote from al-Sharh al-Mumti’ (9/199).
And Allaah knows best.