Intra-Family Mortgage Glossary

 

I. Core Concepts

 

Family Borrower

A Family Borrower is the relative who receives funds under an intra-family mortgage and grants a recorded lien to secure repayment.

The Borrower signs a Promissory Note and executes the appropriate security instrument (Mortgage, Deed of Trust, or Security Deed, depending on the state). When properly structured and recorded, mortgage interest paid to a family member may qualify for the same tax treatment as interest paid to a commercial lender.

 

Family Lender

A Family Lender is the relative who provides funds under a secured intra-family mortgage. The Lender holds the Promissory Note and a recorded lien against the property.

The Lender earns interest and is responsible for applicable tax reporting, including interest income and compliance with the Applicable Federal Rate (AFR).

 

Gift vs. Loan

A Gift is a transfer of money or property without expectation of repayment.
A Loan is a legally enforceable agreement requiring repayment under defined terms.

If a transaction lacks documentation, charges below-market interest, or is not properly secured, it may be treated — in whole or in part — as a gift for tax purposes.

Why this matters: Clear documentation distinguishes financial support intended as a loan from support intended as a gift.

 

Intra-Family Mortgage

An Intra-Family Mortgage is a real estate loan made directly between family members and secured by a recorded lien on real estate.

Instead of borrowing from a bank, the Borrower signs a Promissory Note and Mortgage (or Deed of Trust / Security Deed, depending on the state) in favor of a relative acting as the Lender.

When properly documented and recorded, an intra-family mortgage is treated as a secured loan under state real estate law and federal tax law. The loan should meet applicable IRS standards, including minimum interest rate requirements, to avoid recharacterization as a gift.

Why this matters: Proper documentation provides structure, enforceability, and tax clarity that informal family loans often lack.

 

National Family Mortgage ®

National Family Mortgage® is an online platform that provides standardized Forms and Templates designed to help families document intra-family mortgage loans secured by residential real estate.

Loan terms are determined solely by the participating family members. Users create and use their own Loan Documents at their own discretion.

Why this matters: The lending relationship exists directly between relatives.

 

II. IRS & Tax Concepts

 

Annual IRS Gift Tax Exclusion

The Annual Gift Tax Exclusion is the amount an individual may give to another person each year without reducing their lifetime estate and gift tax exemption or triggering federal gift tax liability, subject to IRS limits in effect for that year.

 

Applicable Federal Rate (AFR)

The Applicable Federal Rate (AFR) is the minimum interest rate published monthly by the IRS for private loans, including loans between family members.

AFRs are categorized as short-term (three years or less), mid-term (more than three years and up to nine years), and long-term (more than nine years).

For term loans, once issued at or above the correct AFR for the month of closing, that rate may generally remain fixed for the life of the loan.

Why this matters: Using the correct AFR helps preserve the loan’s tax integrity.

 

Below-Market Loan

A Below-Market Loan charges interest below the applicable AFR. The IRS may impute interest and treat part of the transaction as a gift.

 

Capital Gains Deferral

Capital Gains Deferral refers to recognizing taxable gain over time rather than in a single year when installment sale rules apply.

 

Gift Tax

Gift Tax is a federal tax that may apply when money or property is transferred without adequate consideration. Improperly structured family loans may trigger gift tax implications.

 

Imputed Interest

Imputed Interest is interest the IRS treats as earned even if not actually charged or collected, typically when a loan is below the applicable AFR.

 

IRS Installment Sale Method

The Installment Sale Method allows capital gains from a seller-financed property sale to be recognized over time as payments are received, subject to Internal Revenue Code §453.

 

Lifetime Estate & Gift Tax Exemption

The Lifetime Estate and Gift Tax Exemption is the total amount an individual may transfer during life or at death before federal estate or gift taxes apply. This exemption is subject to change under federal law.

 

III. Loan Structure

 

Amortization

Amortization is the structured repayment of principal and interest through scheduled payments that fully repay a loan by maturity.

 

Balloon Payment

A Balloon Payment is a large final payment due before a loan is fully amortized.

 

Interest-Only Loan

An Interest-Only Loan requires payment of interest during the loan term, with principal due at maturity or paid voluntarily.

 

Piggyback Mortgage (Family Second Mortgage)

A Piggyback Mortgage is a subordinate loan recorded behind a primary mortgage. In family financing, it allows relatives to provide secondary financing alongside a commercial lender.

 

Promissory Note

A Promissory Note is the written agreement outlining the loan amount, interest rate, repayment schedule, maturity date, and default provisions.

 

Recorded Lien

A Recorded Lien is a publicly filed security interest against property that establishes the lender’s legal claim and priority.

 

IV. Loan Lifecycle & Changes

 

Amending an Intra-Family Loan

Modifying terms of an existing loan without replacing the original lien.

 

Forgiving an Intra-Family Loan

Formally canceling all or part of the remaining principal balance owed by the Borrower.

 

Interest Rate Amendment

A modification that changes only the interest rate. The amended rate should meet the AFR in effect at the time of change.

 

Lien Release

The recorded document removing a lender’s claim after the loan has been satisfied.

 

Loan Forgiveness at Death

Estate-directed forgiveness of a remaining loan balance upon the lender’s death.

 

Loan Payoff

Full repayment of the outstanding loan balance.

 

Porting an Intra-Family Mortgage

Substituting new collateral while maintaining the original loan obligation.

 

Refinancing an Intra-Family Loan

Replacing an existing family mortgage with a newly documented loan under updated terms.

 

Substitution of Collateral

Replacing the property securing a loan while preserving the underlying debt obligation.

 

V. Real Estate & Transaction Concepts

 

Appraisal

An Appraisal is an independent professional opinion of a property’s market value.

 

Cash Offer vs. Private Financing (Family Context)

A Cash Offer typically means a purchase without a financing contingency.
Private Financing (Family Context) refers to structured financing provided directly by a relative rather than a bank.

 

Commitment Letter

A Commitment Letter is a formal approval issued by an institutional lender outlining loan terms and conditions.

 

Deed

A Deed is the legal document transferring ownership of real property.

 

Escrow

Escrow is a neutral holding arrangement in which funds and documents are held by a third party until transaction conditions are satisfied.

 

Financing Contingency

A Financing Contingency allows a buyer to cancel a purchase contract if financing cannot be obtained.

 

Mortgagee (Insurance Context)

A Mortgagee is the lender named on an insurance policy as having a secured interest in the property.

 

Pre-Approval Letter

A Pre-Approval Letter is a document issued by an institutional lender indicating conditional approval based on preliminary underwriting.

 

Proof of Funds

Proof of Funds is documentation demonstrating that a buyer has sufficient assets to complete a transaction.

 

Title

Title refers to legal ownership rights in real property.

 

Title Insurance

Insurance protecting against losses arising from title defects or undisclosed liens.

 

VI. Relationship & Planning Concepts

 

Accountability

Clear understanding that loan obligations must be honored under defined terms.

 

Fairness vs. Equality

Distinguishing identical treatment from situationally appropriate treatment among family members.

 

Family Expectations

Shared assumptions about repayment, inheritance, and financial support.

 

Family Wealth Transfer

Intentional movement of assets between generations.

 

Informal Agreement

An undocumented financial arrangement lacking formal enforceability.

 

Intergenerational Wealth

Assets and financial stability passed across generations.

 

Relationship Risk

Potential strain arising from unclear or undocumented financial arrangements.

 

Separation of Family and Finance

Structuring financial arrangements professionally to protect personal relationships.

 

Important Disclaimer:
This Glossary is provided for general informational purposes only. It does not constitute legal, tax, financial, or investment advice. Through its website, National Family Mortgage ® provides access to standardized Forms and Templates to assist families in documenting their own intra-family mortgage arrangements. Users are solely responsible for selecting, completing, and using any documents and for complying with applicable federal, state, and local laws. Families are encouraged to consult qualified legal and tax professionals regarding their specific circumstances.