Input on Family Mortgage

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NewMoneyMustBeSmart
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Input on Family Mortgage

Post by NewMoneyMustBeSmart »

I'm considering loaning my sister $250,000 to refinance her house due to a divorce. She makes $200k with her small business but wrote off $100k so her tax income is $100k. I realize this is a murky area, as the $100k may or may not have been true expenses or discretionary, I don't want to look into this too much. She says she can make the $2250 payment (principal, interest, insurance, taxes) with her single income and I believe her.

The loan offer from a state bank, requiring a cosigner, is at 6.3% for 30 years. This is after today's rate hike.

I was initially asked to cosign and am pretty sure I won't do that.

It appears there are middleman companies like https://www.nationalfamilymortgage.com/ that will serve as a mortgage processor for private loans like this. I'm assuming I'd have first lien on the house.

My buddy suggested that National Family Mortgage charges $100 per month to process the loan - but that seems like an awful lot. On a monthly mortgage payment of $1500, Insurance of $250, and taxes of $500 - that's $100 servicing fee on $2250 or 4.4% - seems awfully high. I'll call them tomorrow to find out costs.

I'd love to hear thoughts and suggestions about the best way to do this - or any anecdotes or information that is relevant to this situation.

Has anyone used a lawyer and self-serviced the loan? Any benefit to setting this up through an LLC or C-Corp? Any risk of me being accused of being a predatory lender? I'm in a Midwestern red state, fwiw.

Caveat Emptor understood re: doing business with family.

Thanks!
-- | Few are those who see with their own eyes and feel with their own hearts - Einstein | *Everything I write here is an unreliable opinion*
exodusNH
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Re: Input on Family Mortgage

Post by exodusNH »

NewMoneyMustBeSmart wrote: Wed Sep 21, 2022 9:17 pm I'm considering loaning my sister $250,000 to refinance her house due to a divorce. She makes $200k with her small business but wrote off $100k so her tax income is $100k. I realize this is a murky area, as the $100k may or may not have been true expenses or discretionary, I don't want to look into this too much. She says she can make the $2250 payment (principal, interest, insurance, taxes) with her single income and I believe her.

The loan offer from a state bank, requiring a cosigner, is at 6.3% for 30 years. This is after today's rate hike.

I was initially asked to cosign and am pretty sure I won't do that.

It appears there are middleman companies like https://www.nationalfamilymortgage.com/ that will serve as a mortgage processor for private loans like this. I'm assuming I'd have first lien on the house.

My buddy suggested that National Family Mortgage charges $100 per month to process the loan - but that seems like an awful lot. On a monthly mortgage payment of $1500, Insurance of $250, and taxes of $500 - that's $100 servicing fee on $2250 or 4.4% - seems awfully high. I'll call them tomorrow to find out costs.

I'd love to hear thoughts and suggestions about the best way to do this - or any anecdotes or information that is relevant to this situation.

Has anyone used a lawyer and self-serviced the loan? Any benefit to setting this up through an LLC or C-Corp? Any risk of me being accused of being a predatory lender? I'm in a Midwestern red state, fwiw.

Caveat Emptor understood re: doing business with family.

Thanks!
You will need to charge at least the IRS' minimum interest rate: https://www.irs.gov/applicable-federal-rates

In addition, you will need to claim the mortgage interest as income and pay taxes on it.

You will presumably also need to generate the 1099 for your sister annually.
fabdog
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Re: Input on Family Mortgage

Post by fabdog »

I'd love to hear thoughts and suggestions about the best way to do this - or any anecdotes or information that is relevant to this situation.

Has anyone used a lawyer and self-serviced the loan? Any benefit to setting this up through an LLC or C-Corp? Any risk of me being accused of being a predatory lender? I'm in a Midwestern red state, fwiw.

Caveat Emptor understood re: doing business with family.
As noted above you'll need to charge at least the minimum rate from the IRS table. We did this last summer for our daughter and SIL. In their offer there was no financing contingency. Once offer accepted, the closing/title company had a lawyer on staff who drafted up the mortgage documents for us.
We have the lien on the house, and they pay us monthly. The mortgage was recorded in their county of residence, again the title company handled all that. I believe it was $250 for the drafting, and whatever recording fees would have normally been charged

We are not required to give them a 1098, as making loans is not our primary business. But they can add the interest to their Schedule A if they are itemizing by putting in my SSN. And of course we have to report the mortgage interest. They do not need to provide us a 1099.

So I don't see a need for a company to administer this for you, it can all be done quite easily

Mike
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NewMoneyMustBeSmart
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Re: Input on Family Mortgage

Post by NewMoneyMustBeSmart »

exodusNH wrote: Wed Sep 21, 2022 10:45 pm You will need to charge at least the IRS' minimum interest rate: https://www.irs.gov/applicable-federal-rates

In addition, you will need to claim the mortgage interest as income and pay taxes on it.

You will presumably also need to generate the 1099 for your sister annually.

Agreed on the rate having to be above AFR which is around 3% - given that her existing cosign loan is 6.3% I'm planning to make the rate between 3.5-6.5%.

Agree re: taxed on interest income. Hadn't thought about the 1099 but that's not a huge rock.
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NewMoneyMustBeSmart
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Re: Input on Family Mortgage

Post by NewMoneyMustBeSmart »

fabdog wrote: Thu Sep 22, 2022 7:39 am As noted above you'll need to charge at least the minimum rate from the IRS table. We did this last summer for our daughter and SIL. In their offer there was no financing contingency. Once offer accepted, the closing/title company had a lawyer on staff who drafted up the mortgage documents for us.
Dumb question - but which mortgage documents? I know with our last home purchase I read all the docs I signed - it took a long time :-) But I don't remember them all. I mean - did the title company do all the paperwork, or did you have to write up the loan contract?

fabdog wrote: Thu Sep 22, 2022 7:39 am We have the lien on the house, and they pay us monthly. The mortgage was recorded in their county of residence, again the title company handled all that. I believe it was $250 for the drafting, and whatever recording fees would have normally been charged
Sounds like the title company can do a fair bit of the paperwork and they're accountable for it?
fabdog wrote: Thu Sep 22, 2022 7:39 am We are not required to give them a 1098, as making loans is not our primary business. But they can add the interest to their Schedule A if they are itemizing by putting in my SSN. And of course we have to report the mortgage interest. They do not need to provide us a 1099.

So I don't see a need for a company to administer this for you, it can all be done quite easily

Mike
Thanks for the feedback!
-- | Few are those who see with their own eyes and feel with their own hearts - Einstein | *Everything I write here is an unreliable opinion*
jaj2276
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Re: Input on Family Mortgage

Post by jaj2276 »

NewMoneyMustBeSmart wrote: Wed Sep 21, 2022 9:17 pm ...

Has anyone used a lawyer and self-serviced the loan? Any benefit to setting this up through an LLC or C-Corp? Any risk of me being accused of being a predatory lender? I'm in a Midwestern red state, fwiw.

Caveat Emptor understood re: doing business with family.

Thanks!
I've written two mortgages, both to the same family member. They used an attorney (required in my state) and selected me as their lender. I communicated with the attorneys about the terms of the financing and the mortgage notes were filed with the county. I made clear to them prior to lending the money that I took my lending position seriously and I wouldn't hesitate to foreclose on their house to protect my investment.

The family member sends me a check every month and I send them a statement every month once I receive payment. The interest rate when I made the loan was 4.5% when rates themselves were in the 3% range (although likely not for them). Now with rates at 6% this loan isn't the great deal for me as it once was.

The only thing I wish that could be done with these private loans is the ability to report them to the credit bureaus. I'd love for my family member's credit to be helped by their on-time payments but alas it doesn't seem like this is possible.

Anyways, other than the caveat you mentioned about doing business with family, I think it's a win-win for both parties.
7eight9
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Re: Input on Family Mortgage

Post by 7eight9 »

Depending on how much equity is in the home you might consider offering a xx year interest only mortgage. This will afford your sister lower payments and strongly incentivize her to get her credit/financials cleaned up enough to refi out when the mortgage comes due.
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fabdog
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Re: Input on Family Mortgage

Post by fabdog »

Dumb question - but which mortgage documents? I know with our last home purchase I read all the docs I signed - it took a long time :-) But I don't remember them all. I mean - did the title company do all the paperwork, or did you have to write up the loan contract?
The title company did it all. They wrote up the mortgage, and had that as part of the overall package that got signed.

Mike
Retired2013
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Re: Input on Family Mortgage

Post by Retired2013 »

I took a mtg loan with my mother some 30 years-ago. She was looking for a higher yield on her CD as rates were dropping. The rate we paid was the same as if we took the mtg from the bank, 10.5% :o Win! Win! She received a higher rate from the mgt, and we didn't have to pay closing costs other than the attorney fee to close the mtg and file it with the county.

One problem we had with my mother would be that she held our checks for several months before going to the bank. Solution was that we would go to her bank and deposit the check into her checking acct.

Another thing that was done each year was that we provided an amortization schedule reflecting the payments made for the year. We were prepaying the mtg so the amortization was changing with the prepayments. The amortization schedule was then used for tax return.
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JoeRetire
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Re: Input on Family Mortgage

Post by JoeRetire »

NewMoneyMustBeSmart wrote: Wed Sep 21, 2022 9:17 pmShe says she can make the $2250 payment (principal, interest, insurance, taxes) with her single income and I believe her.
But clearly her bank (who is in the lending business) doesn't.

Take that as a hint.
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the_wiki
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Re: Input on Family Mortgage

Post by the_wiki »

This is a good way to lose both money and a close family relationship at the same time.

Imagine she stops paying, then what do you do? Foreclose on your own sister? Then she will hate you. But if you don't, you will resent her.

Don't do it.
DSBH
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Re: Input on Family Mortgage

Post by DSBH »

NewMoneyMustBeSmart wrote: Wed Sep 21, 2022 9:17 pm I'm considering loaning my sister $250,000 to refinance her house due to a divorce.
...
It appears there are middleman companies like https://www.nationalfamilymortgage.com/ that will serve as a mortgage processor for private loans like this. I'm assuming I'd have first lien on the house.

My buddy suggested that National Family Mortgage charges $100 per month to process the loan - but that seems like an awful lot. On a monthly mortgage payment of $1500, Insurance of $250, and taxes of $500 - that's $100 servicing fee on $2250 or 4.4% - seems awfully high. I'll call them tomorrow to find out costs.
Caveat Emptor understood re: doing business with family.

Thanks!
According to their web site - https://www.nationalfamilymortgage.com/ ... /products/ - a 250K loan requires a one-time set up fee of $1,075. The optional loan monthly servicing fee is $15/month.
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Re: Input on Family Mortgage

Post by NewMoneyMustBeSmart »

DSBH wrote: Thu Sep 22, 2022 12:44 pm According to their web site - https://www.nationalfamilymortgage.com/ ... /products/ - a 250K loan requires a one-time set up fee of $1,075. The optional loan monthly servicing fee is $15/month.
I found that this morning, thanks! 2 Atttorneys I spoke with today quoted $750-$2k to do the paperwork.

Note that the loan serving fee is "starting at" $15/mo :-)
-- | Few are those who see with their own eyes and feel with their own hearts - Einstein | *Everything I write here is an unreliable opinion*
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NewMoneyMustBeSmart
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Re: Input on Family Mortgage

Post by NewMoneyMustBeSmart »

the_wiki wrote: Thu Sep 22, 2022 12:42 pm This is a good way to lose both money and a close family relationship at the same time.

Imagine she stops paying, then what do you do? Foreclose on your own sister? Then she will hate you. But if you don't, you will resent her.

Don't do it.
Reasonable advice, but the BATNA appears to be that her and my niblings move into an apartment, away from their home of 5 years.

Not sure there's a both good and safe option here.
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aristotelian
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Re: Input on Family Mortgage

Post by aristotelian »

NewMoneyMustBeSmart wrote: Thu Sep 22, 2022 1:08 pm
DSBH wrote: Thu Sep 22, 2022 12:44 pm According to their web site - https://www.nationalfamilymortgage.com/ ... /products/ - a 250K loan requires a one-time set up fee of $1,075. The optional loan monthly servicing fee is $15/month.
I found that this morning, thanks! 2 Atttorneys I spoke with today quoted $750-$2k to do the paperwork.

Note that the loan serving fee is "starting at" $15/mo :-)
$15 bucks to cash a check. Sharks!
jwfails
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Re: Input on Family Mortgage

Post by jwfails »

Here is what I did. My brother was going thru a divorce and couldn’t get a mortgage due to bad credit. He was a good risk for me, same job for 20 plus years. Bad credit due to forclosure during divorce.
He found a house and I bought it with a mortgage. I set up the payments on autodraft out of my account, he autodrafted into my account. This way I made sure the payment was never late. The house was in my name so I was protected in case he defaulted. I gave him 5 years to clean up credit and buy the house from me. I used an accountant to keep track of the taxes, depreciation, etc. When I sold it to him he paid all the closing cost and I let him keep all the appreciation. The accountant made sure everything was legal and all IRS rules were followed. It worked out for him and I was glad I could help him. Just a different way of doing it.
DSBH
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Re: Input on Family Mortgage

Post by DSBH »

aristotelian wrote: Thu Sep 22, 2022 1:23 pm
NewMoneyMustBeSmart wrote: Thu Sep 22, 2022 1:08 pm
DSBH wrote: Thu Sep 22, 2022 12:44 pm According to their web site - https://www.nationalfamilymortgage.com/ ... /products/ - a 250K loan requires a one-time set up fee of $1,075. The optional loan monthly servicing fee is $15/month.
I found that this morning, thanks! 2 Atttorneys I spoke with today quoted $750-$2k to do the paperwork.

Note that the loan serving fee is "starting at" $15/mo :-)
$15 bucks to cash a check. Sharks!
$15/month but only for loan under 400k :annoyed
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twh
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Re: Input on Family Mortgage

Post by twh »

You many not need to use the IRS minimum interest rate schedule if you decide to do something modeled after an ARM...say a 10/1 ARM. I think as long as you have something that she could have received on the open market you are covered. Keep a copy of the comparable offer.
dallasjava
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Re: Input on Family Mortgage

Post by dallasjava »

NewMoneyMustBeSmart wrote: Wed Sep 21, 2022 9:17 pm I'm considering loaning my sister $250,000 to refinance her house due to a divorce. She makes $200k with her small business but wrote off $100k so her tax income is $100k.
What is a write off in this context? Is it a business expense or a write off of account receivables? I would take a look at her credit report and tax returns so you can get a true gauge of her financial situation.
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Lee_WSP
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Re: Input on Family Mortgage

Post by Lee_WSP »

Unless you're very okay with the possibility of needing to write it off and consider it a gift (and then file a 709), it's a bad idea. Not from a legal perspective, but from a personal and business one. Legally, it's just a matter of documenting everything, following the procedures, and actually following through with the contract.
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