Private mortgage to DD and DSinLaw

[Lucie]

My daughter and son-in-law are purchasing a house from his mother. She is gifting them some of the equity. The sale price will be $80,000. With $22,000 down, they will need about $64,000 with closing costs. We plan to gift them $30,000 and are willing to hold the mortgage of the remaining $32,000 to save them bank mortgage fees, etc.

The seller’s attorney states: "there will be a $300-$400 for the lender attorney fee, which is always paid by the Buyer (even though the “lender” is her parents as opposed to a bank, they still need to be represented).”

My question is: Is there another way around this? Can we just draft up a private notarized mortgage agreement and put the money in their account for closing? Or can we provide a personal loan for $32,000 with a legal promissory note? We plan to do everything above board, including charging interest as required by the IRS. We don’t want to raise any questions with the IRS.

My daughter is very financially responsible. I have no concerns about their ability or willingness to pay the loan. As one of our 3 heirs, she would have a lot more to lose than $32K. So that is not a concern. My parents provided the same opportunity when I purchased my first house and we’d like to do the same.

 

[pb4uski]

Yes, I see no reason that your DD/DSIL can't just tell them that they are paying cash. You provide them with $32,000 that they use for the home purchase and they sign a promissory note.

If you wish to you can later exchange the promissory note for a mortgage note with the property as collateral and have it recorded. If you're going to do that just make sure that you and your DD/DSIL are on the same page on that second step. It would probably be best to have a lawyer do the mortgage note and have it recorded.

 

[CRLLS]

Loaning your daughter and son-in-law that $32,000 does not need to be a secured loan if you don't want it to be. It could simply be a private loan. IOW, they would hold the title free and clear, and you would hold an unsecured loan. Definitely document the loan conditions. Also make sure that the interest rate charged meets the IRS minimum requirements. Here they are for March of 2022.

https://www.irs.gov/pub/irs-drop/rr-22-04.pdf

 

[OldShooter]

... The seller’s attorney states: "there will be a $300-$400 for the lender attorney fee, which is always paid by the Buyer (even though the “lender” is her parents as opposed to a bank, they still need to be represented).” ...

I don’t even understand this. The buyer's side of the closing statement is none of his business.

That said, you should run all this by an attorney and have proper documents drafted. IMO you should also secure your interest with the property. Everything is roses now, but the future for this couple is unknown. Something bad, not their fault, could happen.

You may also want to address the mortgage asset in your estate plan so other heirs know what your wishes are. It would not be fair for the other two heirs to end up each with 1/3 undivided interest in an unsecured loan to heir #3.

 

[ExFlyBoy5]

I don’t even understand this. The buyer's side of the closing statement is none of his business.

Well, if there is a qualifying loan*, then it WOULD (more specifically should) be disclosed as required by law (TILA/RESPA and Regulation Z) with the closing disclosure. The seller may not like that, but it's not their choice to make.

*Not inclined to get into the specifics and not relevant to my statement. Further reading here.

 

[Stormy Kromer]

My grandma loaned a cousin $5,000 to help with a down payment on his house. When she died the note disappeared and the cousin couldn't remember anything. My mom was the executrix, she had seen the note when Grandma was alive. It really caused family problems.

I can understand wanting to avoid lender closing costs on a house loan, plus its a pain. How about you buy the place outright for $64k and sell it to DD & DSIL for $32,000 on a contract for deed recorded at the county courthouse.

I admire your generosity and would like to do the same thing. By gifting one child $30,000 you may already be creating an imbalance among the children without knowing it. This is something that needs to be addressed in writing in case something happens to you before you can do the same with the other children. Don't wait for you will to settle things up, it may not work like you planned.

 

[kgtest]

My daughter and son-in-law are purchasing a house from his mother. She is gifting them some of the equity. The sale price will be $80,000. With $22,000 down, they will need about $64,000 with closing costs. We plan to gift them $30,000 and are willing to hold the mortgage of the remaining $32,000 to save them bank mortgage fees, etc.

The seller’s attorney states: "there will be a $300-$400 for the lender attorney fee, which is always paid by the Buyer (even though the “lender” is her parents as opposed to a bank, they still need to be represented).”

My question is: Is there another way around this? Can we just draft up a private notarized mortgage agreement and put the money in their account for closing? Or can we provide a personal loan for $32,000 with a legal promissory note? We plan to do everything above board, including charging interest as required by the IRS. We don’t want to raise any questions with the IRS.

My daughter is very financially responsible. I have no concerns about their ability or willingness to pay the loan. As one of our 3 heirs, she would have a lot more to lose than $32K. So that is not a concern. My parents provided the same opportunity when I purchased my first house and we’d like to do the same.

The rules may be different where you are...but when I was younger, my dad did something similar. We created a bill of sale, filed the necessary title transfer with the county we lived in and my name, and he printed out some payment coupon books with a payment plan that I signed.

It worked out well and he sold me the property for $1. At least that's what the paperwork with the county stated.

 

[RetiredAndLovingIt]

I bought the house for my daughter to live in and put both her name and mine on the title so she could claim a first time buyers credit. The mortgage was in my name but she paid it along with the home insurance and once she had repaid me back my down payment and closing costs, I had her refinance the mortgage into her and her husbands name and I quit claimed the house to them for $1. I also had her sign a Quit claim over to me at the very beginning just in case things went south and I needed to kick her out.
Of course that never happened and they paid me back within 4 years.

 

[OldShooter]

Well, if there is a qualifying loan*, then it WOULD (more specifically should) be disclosed as required by law (TILA/RESPA and Regulation Z) with the closing disclosure. The seller may not like that, but it's not their choice to make.

*Not inclined to get into the specifics and not relevant to my statement. Further reading here.

Well, you're the lawyer. I said I didn't understand because it seemed that the sellers' lawyer was dictating to the buyers something that they didn't need and which was none of his business either. If it was an expense the the sellers would have to pay that would be a different matter.

 

[Bamaman]

It's one thing to gift your child some money to go against a home down payment. But to carry a mortgage for a daughter and son in law is not necessarily the best thing. With the equity they've got, let'em apply for a small mortgage on their own. You've already done enough.

I had a beautiful wife who my parents adored. And they'd fronted me the money to get into a nice 3/2 brick home with double car garage. But at age 25, my bride decided she hadn't sown enough wild oats. And with great debt young, fashionable ladies can run up I was having a hard time cash flowing my house payment. Let me just say a quit claim deed wasn't the easiest document to get executed voluntarily.

Today's daughter/son in laws can be your best friend today and not your best friend after a divorce. Let'em stand on their own feet.

 

[Lucie]

Thank you all for your input. There is a lot of good advice here to read and consider. I will ponder this over the weekend, but wanted to express my appreciation for the quick and thought provoking responses. As an aside, a $30K gift will be available to all three of our kids for down payments. It is important for us to be equitable across the board.

 

[Stormy Kromer]

Thank you all for your input. There is a lot of good advice here to read and consider. I will ponder this over the weekend, but wanted to express my appreciation for the quick and thought provoking responses. As an aside, a $30K gift will be available to all three of our kids for down payments. It is important for us to be equitable across the board.

Good for you. Help them all now when you can see the enjoy your efforts. Best wishes with your plans, I don't know why it can't work out for everyone.