We want to make your family mortgage loan a success and you happy.
Q1: A relative is lending me money to refinance student loan debt, secured by my home equity. Can’t I just download a free promissory note from the internet?
Sure you can! But, this is a risky choice. If you use a simple promissory note, you and your relative will need to do several things on your own to ensure that you minimize financial risk, maximize tax benefits, and avoid the emotional pitfalls of lending money to family members.
Create a state and county approved Mortgage / Deed of Trust / Security Deed agreement — not just a promissory note.
Record the Mortgage / Deed of Trust / Security Deed with the proper local government authority.
Manage the repayment plan, including: tracking interest payments, recalculating the Borrower's payment schedule to accommodate missed payments, late payments, partial payments, pre-payments, and preparing year-end tax data.
If a Lender wants to write off a defaulted loan or mortgage as bad debt, they must demonstrate to the IRS that the loan was properly documented, that the loan was legitimate, and enforcement of the loan terms was real.
Professional documentation and loan management with monthly statements, electronic payment processing, online account access, and annual IRS tax forms reduces the risk and stress of managing a complex transaction on your own.
Professional, third-party involvement helps demonstrate to the IRS that your transaction is a legitimate loan transaction. At the very least, third-party loan management provides a buffer between relatives, protects relationships, and keeps the transaction business-like.
Q2: Do we really have to keep track of and report the Lender’s interest income to the IRS?
Yes — if the loan is over $10K, Lenders are legally required to report earning interest on their loan at an interest rate that meets or exceeds the proper IRS Applicable Federal Rate in effect at the time the loan is made.
Q3: We’re concerned that the IRS Applicable Federal Rate is rising. Is there a way for us to lock in the current IRS Applicable Federal Rate now?
When it comes to cash loans, the IRS requires the loan parties meet or exceed the proper IRS Applicable Federal Rate in effect at the time the loan occurs. Families should use whatever AFR is in effect on the day the Lender disburses the loan.
Q4: Why does it matter that we record the mortgage with public authorities?
If the Lender wants meaningful collateral, via a legally enforceable lien on the Borrower's home, then the lien absolutely must be recorded with the proper government authority.
Q5: What if the Lender or Borrower dies during the course of the Loan?
If the Lender dies during the course of the loan, the statutory default will require the Borrower to repay the Lender's estate according to the original agreed upon terms of the loan. Lenders should consider updating their estate planning documents to include any explicit wishes or expectations for the debt following their death.
If the Borrower dies during the course of the loan, the statutory default still requires their estate to repay the loan at the agreed upon terms.
Q6: Can a Lender forgive an outstanding loan balance upon their death?
Some families, under the guidance of their attorney, financial advisor, or trusted tax professional, will add an Addendum to our Promissory Note, which forgives the Borrower's debt following the Lender's death. This type of loan provision is generally referred to as a "self-cancellation clause." In practice, the self-cancellation clause removes the Family Mortgage asset from the deceased Lender's estate for estate tax purposes and is not subject to gift tax. However, the IRS has a history of scrutinizing self-canceling debts on a case by case basis, including, the age and general health of the Lender at the time of the loan. Please proceed with caution when considering the implementation of a self-cancellation provision with a Family Mortgage. As always, we strongly encourage all clients to discuss their individual, unique situation with their attorney, financial advisor, or trusted tax professional.
Q7: Can a Family Mortgage be crowd funded by multiple relatives?
Neither our Win-Win Mortgage ®, nor our Gift Mortgage ® can support multiple Lenders beyond Lender #1 and Lender #2, who are typically a married couple. Clients who wish to crowd-fund fund their Family Mortgage with pooled contributions from multiple Lenders (i.e., multiple households) such as Parents, Aunts/Uncles, and Siblings, will need to structure multiple Family Mortgages as 1st, 2nd, or 3rd position liens.
For example, imagine your Mother and Father wish to lend you $75K, and your Aunt and Uncle wish to lend you $50K. We could generate a primary Family Mortgage for Mom and Dad, and a secondary Family Mortgage for the Aunt and Uncle.
Alternatively, some families, with advanced estate planning resources, will lend through a Family Trust. The Family Trust may include several extended family members, even multiple generations, who behind the scenes are Beneficiaries or Members of the group.
Please consult your trusted estate planner or attorney to learn more about if creating such an investment vehicle is appropriate for you.
Q8: How does the Loan Servicing work?
Our Loan Servicing partner, FCI Lender Services, will send monthly email statements to both the Borrower and Lender. On the first of each month, FCI will collect the Borrower's payment through an ACH pull from whatever bank account the Borrower chooses. The standard ACH clearing period of the payment is 3 - 4 business days and an ACH deposit is made to the bank account of the Lender's choice. FCI Lender Services will handle all of the accounting on the loan. Both parties have online account access, there are no prepayment penalties, and both parties will receive formal, annual IRS tax documents. The Borrower receives a 1098 tax form, used to claim the popular home loan interest deduction. The Lender receives an INT-1099, used to report the earned interest income on the loan.
The Loan Servicing is "all or nothing." Meaning, you can't just sign up for the annual tax forms. The whole platform is an automated software process which includes managing the monthly payment. Pricing for this optional Loan Servicing can be found on Page 9 of our Family Mortgage Guide.
Q9: Will my payment history be reported to the credit agencies?
Unfortunately, right now, the credit agencies will not honor reporting data on intra-family loan payments. In short, as the majority of National Family Mortgage ® are between parents and their adult children, the credit agencies are concerned that such loans are inherently biased. The agencies are concerned that all of our clients would reap the credit building benefits of on-time payments, but if times get tough, the potential flexibility of a family loan could take effect. Presumably, if a Borrower loses their job, gets sick, or is dealing with another hardship, a family Lender will extend some kind of courtesy. This may include gifted payment, deferred payments, or a total restructuring of the loan. Obviously, an institutional lender would never be so understanding. The credit agencies fear National Family Mortgage ® clients would exploit a one-way credit building opportunity, with no penalties for late or missed payments.
Q10: What are the mechanics should the Lender wish to extend the Borrower an annual financial gift?
There are two ways Lenders may choose to manage annual gifting to their Borrower:
Make a cash gift. The Lender makes a cash gift of up to $15K per person, with the informal expectation that the gift will be used as a principal pre-payment on the loan. The Borrower can then either mail our Loan Servicing partner, FCI Lender Services, a check for the amount of the gift, or log into their online account with FCI and authorize a larger one-time draft from their bank account on the Borrower's next standard payment date. Since there are no prepayments penalties on the loan, it doesn't cost anything to manage the gifting this way. The principal pre-payment will be credited to the Lender and all of the accounting on the loan will be updated appropriately.
Authorize a principal reduction. In lieu of giving the Borrower a cash gift, the Lender may simply elect to use their annual IRS $15K per person gift exclusion in the form of a principal reduction on the loan. This will require the Lender to send our Loan Servicing partner, FCI Lender Services, written authorization to reduce the loan balance by whatever amount the Lender wishes choose. While this approach ultimately has the same net-effect of a Borrower making a principal prepayment, technically speaking, it's considered a Lender approved reduction. Therefore, FCI will charge the Lender $55 to implement the principal reduction and update the account. Lenders should also memorialize their decision to exercise their annual gift in this way with a gift letter to the Borrower.
Conservative advisors always suggest families memorialize financial gifts in writing and maintain records of such transactions as with other important legal and tax documents. We encourage all families to discuss their individual gift strategy and potential estate planning and tax considerations with their trusted estate planner or tax advisor.
Q11: How do we release the Mortgage / Deed of Trust / Security Deed on the property once the loan is over?
Most of our clients pay-off their loan through the sale of their property. Typically, the closing attorney, title company, or escrow company that conducts the settlement on the sale of the property, will also prepare and file the lien release for the Family Mortgage.
Additionally, our Loan Servicing partner, FCI Lender Services, can prepare and file the lien release as part of closing out the family's Loan Servicing account (with the exception of properties located in Colorado.)
National Family Mortgage ® does not generate or file lien releases or assignments.
Q12: Who are your competitors?
Practically speaking, our biggest competition would be a local estate attorney. Estate attorneys generally have both the tax code and real estate background to help families generate promissory notes and state/county specific real estate liens. Naturally, estate planners usually charge a premium for their expertise. Of course, estate planners simply cannot, and frankly don't want to, service family mortgage loans. For this reason, most attorneys are happy to work with us!
Alternatively, several other online companies claim to facilitate "home loans" between relatives. Please remember, an unsecured promissory note does not equal a registered, tax deductible mortgage loan. The legal and tax ramifications of a poorly documented intra-family mortgage loan can be a nightmare for both Lenders and Borrowers alike.
Likewise, many money transfer companies also claim to "manage" loans between relatives. Please remember, the business of mortgage loan servicing is tightly regulated by federal and state laws — even when servicing mortgage loans between relatives.
Since 2010, National Family Mortgage ® has successfully helped thousands of families in every state across the US lend over $1 Billion in home loans between relatives. Best of all, our default rate is under 1.00%!
National Family Mortgage ® LoanBack LendingKarma Zirtue Exilend LoanKin ZimpleMoney "Free" Legal Doc Websites State and county specific Mortgage lien, Deed of Trust, Security Deed documentation % x x x x x x ? Coordination of lien recording with local government authority % x x x x x x x Tax-deductible home mortgage loan products % x x x x x x ? Licensed, third-party, federal/state Dodd-Frank Act compliant national mortgage loan servicing platform % x x x x x x x Licensed year-end 1098 and INT-1099 IRS tax forms and IRS reporting % x x x x x x x National lien release solution* % x x x x x x x
*When clients participate in our optional Loan Servicing platform, powered by our partner, FCI Lender Services, FCI can prepare and file the local lien release once a debt has been satisfied. However, due to unique state regulations, FCI is unable to prepare and file the lien release for properties in Colorado. Borrowers in Colorado should plan on having a local Title Company or Attorney assist with the lien release, which is often done when one sells their home.