Private Mortgages, How to Loan to the Kids or Family Members

Helping the Kids Responsibly with Private Mortgages

Often a family member or child may need financial help.  This may involve the purchase or renovation of a home or some other need.  The person willing to may wish to help out but also wants to be repaid.  A solution may be a Private Mortgage.  This is where the parent loans the funds in a formal promissory note and uses a mortgage to secure payment.  This arrangement can have the following benefits:

• Lower financing cost for the children compared to a commercial note & mortgage

• Higher rate of return for the parents compared to certificate of deposit

• Security for the parents in the event of default

• The son or daughter can avoid many of the costs of a commercial loan & mortgage, including:

  • Origination fees

  • Inspections

  • Title insurance

  • Closing costs

• A child with credit issues or unverifiable income may not qualify for a conventional loan

• A Private Mortgage can protect the lender’s security from subsequent creditors’ liens

• Parents can integrate the loan with their estate plan with debt forgiveness as part of the kid’s inheritance

• If structured properly, the loan will not incur gift taxes

• Flexibility, the note can provide for:

  • Interest only payments

  • Quarterly payments

  • Balloon payments

  • Payment upon the occurrence of a certain event

What you will need:

Promissory Note or Line of Credit Note

Mortgage Agreement

One Time Mortgage Tax to County Treasurer (sliding scale from 0.02% to 0.1% of the principal)

One Time Mortgage Certification to County Treasurer Fee $5.00

One Time County Clerk Recording Fee ($13 for 1^st page and $2 for each additional page)

(A  $30,000 mortgage would cost about $55 in filing, certification and mortgage taxes.)

Expect about $500-700 for attorney’s preparation and review of documents.

Disadvantages:

Creation of a lender/borrower agreement may strain family relationships.

Foreclosure, if needed, can be expensive and damage family relationships

You must file IRS form 1098 and send a copy to the payer by January 31^st of each year.

You must claim interest received as income.