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Q1: We’re concerned that the IRS Applicable Federal Rate is rising. Is there a way for clients to lock in the current IRS Applicable Federal Rate now?

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 home / loan closing date.

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 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.

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 are concerned that National Family Mortgage ® clients would exploit a one-way credit building opportunity, with no penalties for late or missed payments.

Q6: 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.

If necessary, the attorney who helps settle the Borrower’s estate can also prepare and file the lien release once the loan is over

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