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Q1: 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. Since most state laws require the integration of the Family Loan documents into the Borrower’s real estate closing / settlement, families should use whatever AFR is in effect on the Borrower’s closing date.

The IRS makes a clear distinction between a cash loan and an installment sale, as with a Seller Finance transaction. When Seller Financing a home, the parties may use the lowest Applicable Federal Rate in effect including the two months prior to the date of the closing. So, if the closing occurs in June, but the April AFR is more favorable, the April AFR may be used.

Q2: 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. 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.

Q3: 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.

Q4: Do you issue pre-approval letters?

Since National Family Mortgage ® neither lends money nor handles the disbursement of loans between family members we do not issue mortgage pre-approval letters. However, all of our clients have successfully satisfied the needs of relevant third parties seeking proof of access to home financing through the following methods:

  • Provide a letter directly from the Lender or their financial advisor verifying that financing has been approved.
  • Provide a copy of a recent banking statement verifying the availability of the Lenders funds.
  • Offer to deposit the Lender’s funds in a neutral escrow account managed by an appropriate third party (i.e., real estate office, title company, attorney, etc.)
Q5: Will the Borrower’s 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.

Q6: How much money can a homeowner borrow with the Caregiver Mortgage ®?

The only limit on our Caregiver Mortgage ® is the amount the Lender is willing to lend. Our unique Reverse
Mortgage calculator found on our website helps you select an amount based on a variety of factors, including:

  • Value of the property
  • Monthly cash-flow needs
  • Loan term

Our calculator also takes into account appreciation of the property, annual cost of living adjustments, and allows you to select conservative or generous estimates for loan term and loan-to-value ratios. National Family Mortgage ® recommends that the loan amount not exceed 65% of the value of the property, but the loan to value (LTV) is ultimately up to you (although, state specific limits may apply.)

Q7: Does the Borrower qualify for a Caregiver Mortgage ® if they still have an outstanding mortgage with a bank?

Yes. The Borrower can use the Caregiver Mortgage ® income to make payments on the existing debt on the property. However, the Caregiver Mortgage ® will be registered as a subordinate, secondary lien. Some Caregiver Mortgage ® Lenders will make a large initial disbursement and actually payoff the Borrower’s existing bank mortgage!

Q8: When does the Caregiver Mortgage ® get repaid?

The line of credit becomes due and must be paid in full within when one of the following conditions occur:

  • The last surviving borrower sells the home.
  • The term of the credit-line ends.
  • The last surviving Borrower passes away (The loan must be repaid within 180 days of the death.)
Q9: Are there Caregiver Mortgage ® tax consequences for the Lender or Borrower?

Disbursements from a Caregiver Mortgage ® are considered a loan advance, not income, and therefore are not considered taxable by the IRS. The Lender is required to report taxable earned interest, as ordinary income, annually.

Q10: If the Borrower has a Caregiver Mortgage ® and decides to apply for Medicaid do they need to worry about the mandatory 60 month “look-back” period?

If large, lump sum disbursements have been made and are sitting in their bank account, Medicaid requires use of available cash-funds on long-term care before they can qualify for Medicaid assistance. Under the Deficit Reduction Act of 2005 (DRA), principal residences may be deemed non-countable only to the extent the applicant's equity is less than $572,000 (in 2018), with the states having the option of raising this limit to $858,000 (in 2018). If credit is disbursed and spent monthly, there should be no conflict. National Family Mortgage ® encourages all clients to discuss their particular situation with your trusted estate planner, financial advisor, or tax professional to help determine the best strategy to meet their family’s financial needs.

Q11: How do we release the Deed of Trust / Mortgage / 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.

If necessary, the attorney who helps settle the Borrower’s estate can also prepare and file the lien release.

National Family Mortgage ® does not generate or file lien releases or assignments.