Intra-Family Mortgage

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Mikejenny
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Intra-Family Mortgage

Post by Mikejenny »

Has anyone had experience with an Intra-Family Mortgage (or family mortgage). Our daughter has a new job and has good credit but she has only been out of school for a couple of years and doesn't have a lot of credit history. She is looking to buy a place in the DC/MD/VA area. She didn't ask so she doesn't know we are looking into the topic. One of our neighbors did a family mortgage last year for their son who is in a similar situation- new job and recently out of school- and they just suggested we consider it.
Mike
Jack FFR1846
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Re: Intra-Family Mortgage

Post by Jack FFR1846 »

Has she asked a bank whether she would qualify for a mortgage?

I bought my first house in 1985, 60 days after having graduated from engineering college.
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dickenjb
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Re: Intra-Family Mortgage

Post by dickenjb »

My friend did this for his son. His son had no credit history and could not qualify even though had good job. It was a no brainer for him to lend at more than his bond funds paid. Only suggestion is "do it by the book". Draw up a note and register the lien at the courthouse.
Armydoc
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Re: Intra-Family Mortgage

Post by Armydoc »

I know family members who have done this, generally positive results including low closing costs (very low, aunt is attorney and draws up the note) and little hassle. Definitely agree with above that you should do it by the book, sign the papers, etc. I'll spare you the obvious (what if she can't pay, why not rent until she is more settled, etc).

Actual issues that I have seen:
--lender didn't necessarily want to "refinance" the 6% mortgage when rates went WAY down.
--when kid has to sell for a loss, or is underwater, lender feels bad.
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White Coat Investor
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Re: Intra-Family Mortgage

Post by White Coat Investor »

There are a lot of ways to maximize wealth when multiple generations are willing to work together for the common good. Young people can help provide a backstop allowing older people to have a higher withdrawal rate while older people can minimize the cost of borrowing for homes and educations, not to mention the reduced costs of having multiple generations live together. Estate planning issues are also much easier to deal with when generations are all on the same page. For example, the younger generation can subsidize the older generation's spending in order to ensure they inherit Roth money instead of traditional IRA money, effectively lowering their future taxes and improving their asset protection.

Too bad families have so much trouble working together.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
freddie
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Re: Intra-Family Mortgage

Post by freddie »

I would worry a lot more about the last issue. Or what happens when the daughter decides not to pay. Are you going to foreclose on her?:)
Armydoc wrote:I know family members who have done this, generally positive results including low closing costs (very low, aunt is attorney and draws up the note) and little hassle. Definitely agree with above that you should do it by the book, sign the papers, etc. I'll spare you the obvious (what if she can't pay, why not rent until she is more settled, etc).

Actual issues that I have seen:
--lender didn't necessarily want to "refinance" the 6% mortgage when rates went WAY down.
--when kid has to sell for a loss, or is underwater, lender feels bad.
Armydoc
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Re: Intra-Family Mortgage

Post by Armydoc »

EmergDoc wrote:Too bad families have so much trouble working together.
Too bad indeed! I think that we mainly hear about the stories that ended poorly so advice on these issues tends to be overly cautious. Also, many feel that opening discussing financial issues is some sort of taboo, which makes planning difficult.
Armydoc
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Re: Intra-Family Mortgage

Post by Armydoc »

freddie wrote:what happens when the daughter decides not to pay. Are you going to foreclose on her?
You really should have an idea if this is a real possibility. I have some family members that I would trust more than the FDIC, others not so much.
lovejoypeace
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Re: Intra-Family Mortgage

Post by lovejoypeace »

My dad gave us a loan a few years ago to buy a rental property. The terms were we would pay 4.5% interest. At his death the loan would be forgiven. At the time we were in our late 30's and had no other debt.

I know you want to believe the best in your daughter. How old is she? Is she responsible enough to pay her bills or would she have the mindset that it's to her parents and so it doesn't matter if its late or even paid? Is this her first home? Can you afford to "lose" this amount of money if she doesn't pay, etc.

I really think that people need to make it on their own. Although I knew my parents would be there for me, DH and I struggled thru some rough times without asking for help and I think we are better for the experience. There is something to be said for the satisfaction and pride that comes from knowing that you did something yourself, without help.
Andyrunner
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Re: Intra-Family Mortgage

Post by Andyrunner »

Being right out of college, are you sure she is going to stay in that area? I have seen many friends right out of college who buy homes and then move for work after 2-3 years.

That all being said, I'd say go to a bank. Don't mix family and loans....
whomever
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Re: Intra-Family Mortgage

Post by whomever »

We had one from our parents. It was a good deal all around. IIRC CD's were paying maybe 5% and mortgages were 10%, and the IRS rate (to avoid it being taxed as a gift) was 7.5% or something like that, so it was cheap for us and better than CD's for the parents.

We put something like 50% down, and it wasn't during a bubble, so there wasn't a lot of risk.

Both sides should carefully think about how they will feel if rates zoom and the borrower doesn't want to pay early, or if rates plummet and the kid does pay it off early (vice the long bonds the parents had been holding), etc, etc.

I never asked if my parents thought about default. There was certainly a lot of trust (they never asked if we were carrying homeowner's, for example). I suppose at some point they figured if the house was worth less than 50% of purchase and a new Great Depression left us out of work, that they would have been sharing anyway, or inviting us to move back in with them or whatever. Or vice versa. I guess we just had a lot of mutual trust. We just viewed it as keeping the 5% split in the family.
TheGreyingDuke
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Re: Intra-Family Mortgage

Post by TheGreyingDuke »

Many moons ago, my father wanted to help us out, we had built a first house ourselves (taking down a barn that was in the way of an interstate construction) and when we moved, we were short about $30k for the new house. Dear old Dad had a CD deposited at his local bank and took a loan on the $30k, not officially a mortgage, but this was in the day when all interest was deductible. Each month I got a statement from the bank but there were not requirements to pay anything. We sent on about $500 a month for a couple of years and then, without talking about it, my father paid off the balance.

I am not a believer or practitioner of "their suffering will make them stronger" school and intend to help my son and his wife in a similar fashion, without all the official paperwork. I wouldn't loan them anything I could not afford to lose, worst case scenario.
"Every time I see an adult on a bicycle, I no longer despair for the future of the human race." H.G. Wells
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Mikejenny
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Re: Intra-Family Mortgage

Post by Mikejenny »

Jack FFR1846 wrote:Has she asked a bank whether she would qualify for a mortgage?I bought my first house in 1985, 60 days after having graduated from engineering college.
Jack:
Yes, she did ask a bank about a mo0rtgage. They reviewed her situation and said she could probably get a mortgage but for about 50-60 K less than she would likely need. She has been saving, living a bit like a Boglehead, and does have downpayment money. She actaully would like a 25 year mortgage or was planning on pre-paying principal to the loan.

ArmyDoc asked what if she has to sell at a loss. She wants to put 20% down so she is serious about things. Sure, housing prices can collapse but I think the 20% down does demonstrate some prudence. But, we should think about what to do if that occurred. So, thanks for a good thouught

We still haven't mentioned this possibility to her. Wanted to get some ideas and I have found a company called National Family MOrtgage based up in Massaschusetts that has helps set up this type of thing. Has anyone heasrd of them or ever used them?

Have most folks used their attorney and an accountant to set this up so it doesn't excite the IRS?
Mike
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Watty
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Re: Intra-Family Mortgage

Post by Watty »

They reviewed her situation and said she could probably get a mortgage but for about 50-60 K less than she would likely need
This is a red flag.

Ususally you should not borrow anywhere near as much as you can qualify for.
gogleheads.orb
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Re: Intra-Family Mortgage

Post by gogleheads.orb »

Mikejenny wrote:Has anyone had experience with an Intra-Family Mortgage (or family mortgage). Our daughter has a new job and has good credit but she has only been out of school for a couple of years and doesn't have a lot of credit history. She is looking to buy a place in the DC/MD/VA area. She didn't ask so she doesn't know we are looking into the topic. One of our neighbors did a family mortgage last year for their son who is in a similar situation- new job and recently out of school- and they just suggested we consider it.
Mike
A friend of mine got a mortgage from his parents. I believe that it has to be officially written up to ensure that the borrower can get the mortgage interest deduction. It my friend's case his father was retired UAW, so they got free legal services. If the loan is small enough the legal costs to set it up might need to be taken into account.
Topic Author
Mikejenny
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The Intra-Family Mortgage

Post by Mikejenny »

Mikejenny wrote:They reviewed her situation and said she could probably get a mortgage but for about 50-60 K less than she would likely needThis is a red flag. Ususally you should not borrow anywhere near as much as you can qualify for.

They reviewed her situation and said she could probably get a mortgage but for about 50-60 K less than she would likely need
This is a red flag. Ususally you should not borrow anywhere near as much as you can qualify for.

Watty
Good thought. She had wanted to live very close to where she works in downtown DC. Prices for condos in the area were out of her reach so she is niow looking in the DuPont And Adams Morgan area. Prices there are within what she prequalified for. We still haven't told her about this idea of a family mortgage but may bring it up this week.
Mike
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Mikejenny
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The Family Mortgage

Post by Mikejenny »

We spoke with our daughter last weekend about this family mortgage possibility. I told her from my reading it had to be treated just like an regular mortgege with a formal agreement. She hadn't heard of it before so she had a number of questions
- who writes up the note? ( I told her it would be an attorney who practices in the area. This would be either MD or DC since that would be where the condo would be. Both of us would have to agree on the terms)
- how do use a real estate agent in this? ( I said she should look at any real estate agent as representing the seller and not mention the family mortgage idea or it might limit her ability to negotiate price. Maybe say she would be able put together a 30-35% down payment)
- how does she find an attorney that is familiar with this stuff in the MD/DC area?
- Does she need an accountant to set up the payment schedule and where do the payments go? (to my wife and I but this was always something our mortgage lender set up. Probably not difficult if you work with someone who has done this before)
I what I said pretty accurate so far? Tis is really getting interersting
Thanks.
Mike
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dm200
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Re: Intra-Family Mortgage

Post by dm200 »

A few comments -

It has been my observation over the years that this kind of family borrowing/lending, especially for large, long term such as a home mortgage, frequently leads to various kinds of issues and problems. It can lead to or contribute to family stress or even estrangement. Is that a risk worth taking?

An exception to this, where such arrangements often work out very well, is among those from certain cultures - almost always fairly recent immigrants to the U.S.

An example, in my own family, of a degree (not super serious, but it was there) of the kinds of "issues" that may happen. A close relative and his wife either had or needed a mortgage on their house. His father had more than sufficient assets and liquidity to fund the mortgage. The father offered to make the mortgage loan to his son and daughter-in-law, at very reasonable terms and interest rate. They accepted his offer. The father did want the mortgage/lien recorded. Although I do not (and did not) know all of the details or what other factors may have been involved at the time, I do know that the daughter-in-law took offence (or considered it a slight on her) that her father-in-law wanted and had the mortgage/lien recorded.
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dm200
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Re: The Family Mortgage

Post by dm200 »

Mikejenny wrote:We spoke with our daughter last weekend about this family mortgage possibility. I told her from my reading it had to be treated just like an regular mortgege with a formal agreement. She hadn't heard of it before so she had a number of questions
- who writes up the note? ( I told her it would be an attorney who practices in the area. This would be either MD or DC since that would be where the condo would be. Both of us would have to agree on the terms)
- how do use a real estate agent in this? ( I said she should look at any real estate agent as representing the seller and not mention the family mortgage idea or it might limit her ability to negotiate price. Maybe say she would be able put together a 30-35% down payment)
- how does she find an attorney that is familiar with this stuff in the MD/DC area?
- Does she need an accountant to set up the payment schedule and where do the payments go? (to my wife and I but this was always something our mortgage lender set up. Probably not difficult if you work with someone who has done this before)
I what I said pretty accurate so far? Tis is really getting interersting
Thanks.
Mike
My suggestion is that she get a mortgage from a regular mortgage lender. Having such a mortgage - and showing on-time and regular payment history will help her credit history for future things she may want to do. Then, you do not need to get into all of the kinds of things and issues you bring up.

There are ways you can assist her with the down payment that will enable her to purchase a condo/whatever and qualify for a mortgage. This would involve your making her a gift. The real estate agent can assist in advising just how to (or not to) do this. It can get fairly complicated and detailed - but IMO worth doing.

For a mortgage, it is my opinion (others may not agree) that there are real advantages to borrowing from a lender that will keep the servicing of the mortgage. I strongly lean towards getting a mortgage from a credit union. Living in DC, there are many credit unions she can join, such as HEW Federal, Andrews Federal, Commonwealth One Federal - and some others. As is often pointed out here, there are easy ways to become a member of Pentagon Federal - and PenFed offers good mortgage terms. if she can qualify for Navy Federal membership - that may be even better.
reason-logic
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Re: Intra-Family Mortgage

Post by reason-logic »

Yes. My son relocated and started a new job 3 years ago. He could not qualify for a mortgage.

We loaned him the money to purchase the home. I hired an attorney to draft the note and have the mortgage recorded just like a bank would do. He has made every payment on time.
letsgobobby
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Re: Intra-Family Mortgage

Post by letsgobobby »

EmergDoc wrote:There are a lot of ways to maximize wealth when multiple generations are willing to work together for the common good. Young people can help provide a backstop allowing older people to have a higher withdrawal rate while older people can minimize the cost of borrowing for homes and educations, not to mention the reduced costs of having multiple generations live together. Estate planning issues are also much easier to deal with when generations are all on the same page. For example, the younger generation can subsidize the older generation's spending in order to ensure they inherit Roth money instead of traditional IRA money, effectively lowering their future taxes and improving their asset protection.

Too bad families have so much trouble working together.
Straight out of residency, my dad 69 years old and prime of working, insecure about money, and I fairly broke with a new, reliable, and unspectacular income. I could support a mortgage but didn't have 20% down. I asked my dad for 10% and used a 403b loan for the other 10%. The 80% lender required a document that the 10% from my dad was in fact a gift, and not a loan. Dad none too happy about providing it and we almost all walked away from that arrangement. In the end he provided the letter, separately we structured a promissory note for the $25,000, and paid it off within a year. Dad forgave the interest as part of his annual gift exclusion.

Ten years later we bought a second/investment/future home and approached him again for a loan, this time to create a 'win win' situation for both of us. Knowing he has too much money laying around in cash earning less than 1%, we offered him 3.25% for 12 years, secured by the home. The win for him was higher interest than a 10 year treasury, and keeping the money in the family. The win for us was avoiding a number of fees, expediting the purchase, and keeping the money in the family. We found a document on line and modified it, so it is a true mortgage note. We make monthly automated payments just like our primary residence.

It works in our case because I know a lot about his finances, have declared myself to be responsible with money and a very good credit risk, and my family otherwise has an excellent relationship. The pitfalls, however, are very real. As a lender you'd have to be prepared to declare the loan a gift if it started going bad, or else risk the relationship.
hmw
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Re: Intra-Family Mortgage

Post by hmw »

It all depends on family relationships/trust and credit worthiness.

My parents gave me a large interest free loan to buy my first house after I finished my fellowship. I am the only child. They had the money and trusted me. We didn't do any formal paperwork. I paid them back within 5 years.
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Re: Intra-Family Mortgage

Post by placeholder »

letsgobobby wrote:Straight out of residency, my dad 69 years old and prime of working, insecure about money, and I fairly broke with a new, reliable, and unspectacular income. I could support a mortgage but didn't have 20% down. I asked my dad for 10% and used a 403b loan for the other 10%. The 80% lender required a document that the 10% from my dad was in fact a gift, and not a loan. Dad none too happy about providing it and we almost all walked away from that arrangement. In the end he provided the letter, separately we structured a promissory note for the $25,000, and paid it off within a year. Dad forgave the interest as part of his annual gift exclusion.
Wasn't that mortgage fraud?
sscritic
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Re: Intra-Family Mortgage

Post by sscritic »

letsgobobby wrote:The 80% lender required a document that the 10% from my dad was in fact a gift, and not a loan. Dad none too happy about providing it
Well you learned that your father was an honest man, up until the point you wanted him to be dishonest.
letsgobobby
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Re: Intra-Family Mortgage

Post by letsgobobby »

Interesting point. I didn't really think of it that way because the mortgage lender herself told us to do it. But you're right. I suppose that's why the housing market crashed 3 years later, too much fraud. I feel really guilty now.
dharrythomas
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Re: Intra-Family Mortgage

Post by dharrythomas »

We did it twice with my mother. She won't do stocks and I couldn't refinance our mortgage and after fees have it cost less while we were paying it off early. We did did a no cost refi, cut our interest cost, paid her a rate of interest much higher than her CDs, kept the same payment and cut the number of payments and total cost.

We did the note and ensured that the amount of interest we deducted was matched by her claiming the income.

I never approached her for an initial loan. I was happier letting USAA oversee the initial transaction.

Money can cause a number of family problems so we structured it as a business deal.

Good Luck

Harry
shawcroft
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Re: Intra-Family Mortgage

Post by shawcroft »

sscritic wrote:letsgobobby wrote:
The 80% lender required a document that the 10% from my dad was in fact a gift, and not a loan. Dad none too happy about providing it

Well you learned that your father was an honest man, up until the point you wanted him to be dishonest.
Well, I appreciate my colleagues thoughts on the subject but this is still a very grey area to me. When we bought our first house (about 35 years ago), we suddenly found ourselves $3000 short of some additional closing costs- and very short of time. A family member who found out about the dilemma "gifted " us the money and was happy to write a letter to that effect. We went into financial hibernation until we were able to save up enough to pay him back within 3 months. However, the house purchase could have fallen through without the "gift".

We didn't have anyone in the family at that time- and still don't today- who could have offered us a family mortgage- if they existed back in 1978. The interest rate we had on this house was 9.5%. Hard to believe they are around 4.5% now- less than half what we paid. Blows my mind.
Anyone know what interest rate the IRS approves nowadays for a family mortgage?
Shawcroft
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Re: Intra-Family Mortgage

Post by placeholder »

That's a lot different than saying something is a gift and then generating a promissory note requiring the money be paid back.
mstrcvdstr
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Re: Intra-Family Mortgage

Post by mstrcvdstr »

We have used this service. Keeps it all clean and legal. Cheaper than banks etc.

NationalFamilyMortgage.com
sscritic
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Re: Intra-Family Mortgage

Post by sscritic »

shawcroft wrote: Anyone know what interest rate the IRS approves nowadays for a family mortgage?
The term is Applicable Federal Rate and it applies to any loan, not just a mortgage. In fact, you don't have to charge that much if you don't want to, but then the mortgage will be a gift, at least the interest that you didn't charge part of it.

http://apps.irs.gov/app/picklist/list/federalRates.html
Topic Author
Mikejenny
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The Family Mortgage

Post by Mikejenny »

Our daughter plans to begin house (condo) hunting very soon. From the stuff she has seen listed and the open houses she has visited in the areas she likes in DC and MD, she is convinced she can make a 20% down payment, with room to spare.
The rates for a family mortgage are really attractive and that is being considered.
She hasn’t begun the pre-qualification process yet because she wasn’t sure if she should do that until she/we understood things better.
Her questions:
How should she use a real estate agent in this? Is a buyer’s agent the way to go?
If someone like the seller’s agent knew a family mortgage was possible would this limit her ability to negotiate on a property?
If she doesn't use a buyer's agent, how can she be sure a "regular" real estate agent is representing her interests?
Mike
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thedayisbrave
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Re: Intra-Family Mortgage

Post by thedayisbrave »

Mike,
She should definitely use a buyer's agent, especially if she is unfamiliar with the area. Their local knowledge is the best resource. I myself have a real estate license but when I started looking for homes in an area unfamiliar to me, I immediately contacted a buyer's agent. Once they make contact, she will need to sign an agreement called a 'buyer agency agreement' which will lay out all the rules as far as who is working for who, etc. Typically the buyer's agent represents the buyer and cannot disclose anything to the seller/listing agent - unless the property is also being listed by the buyer's agent. This is called 'dual agency' - some agents practice it, some agents then refer their clients out - just depends on the agent and how comfortable they feel representing the best interests of both sides. If she chooses to forgo a buyer's agent (which I don't recommend), there will be no agent representing her interest - the listing agent she will be contacting will be representing the seller and doesn't have to tell her anything except what is material to the house itself. The buyer's agent gets paid by the seller - so why would you NOT use one?

As far as pre-qualification, etc. - I just went through this myself so it's all fresh. The credit union I attempted to get a pre-qual through could not clear me because though I had a job offer letter in hand with stated income, they couldn't use it until I actually completed day 1 of my job. Given that I want to have my housing settled BEFORE I start my job, it kind of put me in a tough place. A family mortgage was my Plan B (well, a 0% interest loan really - super generous) which ultimately ended up being my Plan A. It's pretty impossible to 'hide' what kind of financing you will use - but it actually could help. In my situation, I positioned myself as a "cash buyer" while negotiating the price - obviously cash talks so it's a tantalizing to sellers - but once an offer is accepted, you will need proof of funds.

Anyway, if your daughter has any questions or wants to talk to someone who just went through this process, feel free to have her contact me (I can PM you my e-mail).
Slowmaha
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Re: Intra-Family Mortgage

Post by Slowmaha »

I got lazy and didn't read all the responses, but if you do it right I think it's a great idea. Others have hit on the interest and closing cost savings.

Something that may not have already been mentioned is titling. My grandparents bought my Dad's first house and just charged him equivalent market interest. They actually kept the title in their name but it was essentially his house.. I mean really, are you ever REALLY a homeowner until you have the title in your hand? Not really. What worked out is when my dad kicked my mom and us two kids out of the house she didn't get anything since the house was in the grandparents name. So, if your daughter gets married and the worst happens, at least she'll still have a roof over her head.. Something to think about.
mudphudstud
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Re: Intra-Family Mortgage

Post by mudphudstud »

Bump!

Another data point here, but one that will require some patience :wink:

DW and I just closed on our first house, financed by an intra-family mortgage from her parents. We were able to beat out another (higher) offer on the house because the seller liked that our offer was "cash" and we could close very quickly. It also saved us money on closing costs (total including inspections, appraisal, title search, title insurance, transfer taxes, etc. was <3% of purchase price). We drew up a formal promissory note and mortgage deed, both signed and notarized by all parties, and the mortgage is registered. Property deed is in DW's and my names. We set our interest at the federal minimum interest rate (AFR), which is about 65% of the current market rate for a mortgage, slightly higher than the current market rate for 5yr jumbo CDs, and about double the current market rate for 1yr standard CDs. We made a small downpayment, because we felt it was the right thing to do (there is no IRS requirement for this with a family mortgage and her parents did not ask for it). There are excellent templates online for helping to create and track an amortization schedule in excel, even including occasional prepayments of principal, which we intend to do.

For context, her parents are in excellent financial health and have been offering to "help" us financially through large gifts for several years, which we have felt too uncomfortable to accept. They have plenty of liquidity, and in fact I don't think they would suffer at all even if we never paid a dime of the loan back, which helps us feel comfortable with the idea at all. Agreeing to accept their help in this form actually feels a bit like a win-win compromise. We have every intention of honoring their generosity and faith in us by making every payment in full and on time. DW and I are both still in residency training, but have excellent job security and credit, with a guarantee of huge salary increases in the next 5-10 years. But even at our current residency salaries, the PITI payments are way below 28% of our gross income. We are both frugal, living well within our means, and steadily contributing to our retirement accounts. We sent copies of both of our credit reports to her parents beforehand, again because we felt it was the right thing to do (again they didn't ask). We could have easily qualified for a similar mortgage through a traditional lender, but would have paid a couple hundred dollars more per month in interest. The interest that we do pay each year will now stay within the family rather than being paid to a lender, preserving wealth within the family.

I'll try to remember to post occasional updates. Hopefully we continue to find ourselves on the "pro" side of the family mortgage debate! :D
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Re: Intra-Family Mortgage

Post by LadyGeek »

This thread is now in the Personal Finance (Not Investing) forum (mortgage).

The thread is from 2014. If it makes sense to continue the discussion in an earlier thread (vs. starting a new one), please bump the older thread instead.
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jfave33
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Re: Intra-Family Mortgage

Post by jfave33 »

https://www.nationalfamilymortgage.com/

Try this. Never done it myself but it was recommended somewhere and I bookmarked it.
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