What Mom Never Told You About Private Mortgages
Of course you are most likely well versed in all of the hoopla you see in the media about mortgages and mortgage lending as well as the supposed recovery of the real estate market in many areas of the country. At the same time, you may feel you are getting the proverbial short end of the stick. For whatever reason, you can’t quite meet the new improved standards that mortgage lenders require for new mortgages. Are there other options?
Thankfully, yes indeed there is at least one other mortgage option that you might want to consider. This option is referred to as a “private mortgage”. Although it sounds very similar, a private mortgage is not quite the same thing as private lending. In the majority of cases, a private mortgage is more about family members or relatives.
For example, suppose your daughter just graduated from college and has a terrific new job with a name brand employer starting next month. You and she both agree this is a terrific opportunity but neither of you are comfortable throwing hard earned money into a landlord’s pocket. However, being a brand new college graduate, she doesn’t quite have the credit power she needs to qualify for the townhouse she wants to buy in the heart of the city.
The Right Way To Do It
In this case, the two of you decide to write up a Private Mortgage. Now understand this: you want to make sure you take the time to do this the right way. No hand scrawled IOU on the napkin at dinner. No, at this point you want to go ahead and consult with an attorney.
You want to find an attorney that is familiar with real estate law in the state the property is located in. When you sit down with this attorney, you will learn that you will need a Promissory Note (you have to charge interest to make this legitimate). This will be similar to the promissory note you are accustomed to seeing with any real estate purchase. The interest rate, the payments as well as the length of the repayment period all need to be spelled out in detail.
The Mortgage Doc
Additionally, you will need the attorney to prepare a deed of trust, which is also referred to as a mortgage or a security deed. This document states that the loan (the promissory note) is secured by the property itself. Also, in order to ensure that your daughter in the example above can in fact deduct the interest on the loan, the deed must be recorded by the local authority. Most often, this will be the county clerk recording office. Note that the attorney you chose will most likely take care of this task on your behalf.
That’s pretty much it. Now your daughter can move into the townhouse and be ready to go with her exciting new position. However, be forewarned. This is where it is easy to drop the ball. You see, to be completely onboard with this so that the letter of the law is followed and your daughter gets the tax breaks for the payments, there has to be a paper trail. Whether you send a monthly bill or just copy the checks she sends, you want to do this so that everyone comes out ahead.
Interestingly, there is now at least one company out there that will take care of a lot of the paperwork afterwords. For a monthly fee, National Family Mortgage will take of all this paperwork for you. That means, your daughter will receive regular monthly statements as well as the annual tax reporting.
All of that aside, the option of setting up a private mortgage can work in you and your family’s favor. Consider how the private mortgage actually helps out both parties. The parents receive a monthly cash flow whereas the daughter receives a low cost mortgage.
What About You?
Now you know the inside scoop on Private Mortgages. Have you ever considered a Private Mortgage as an option?