Can my parents make me a mortgage loan?
June 5, 2014 12:04 PM   Subscribe

Trying to buy a house. Have money for a down payment, but I'm self-employed and was turned down for a traditional loan. My parents are willing to lend me the money I'd need for the balance, and have me pay them back with interest, รก la a mortgage loan. Is this doable?

I've been renting for years, and wanting to buy for years. I know I can swing it financially (have a lot of savings, though not enough to buy a big-enough house outright). But because I am self-employed, particularly because I had a very bad year in 2012, I haven't been able to secure a traditional loan. My parents are willing to lend to me, and I see this as a nice chance to potentially keep that money in the family, instead of having it go to a bank. My question is about whether this could work, and how it would be structured: Would it technically be a large gift to me? Something else? If it's a big gift that comes in a lump, will they/we have to pay gift tax on it? Whom should we be talking to as we structure this? Ideally, it would work out that I am the legal owner of the house, not my parents.

You are not my accountant. (Though if you know of a professional I should talk to, feel free to memail me a recommendation.)
posted by toomuchkatherine to Home & Garden (12 answers total)
Sure, this would make it a cash sale and it's a LOT easier to buy the house you want with cash. Also, it'll be cheaper because you're parents aren't going to charge you Mortgage Insurance.

Okay, you need to get a real estate lawyer involved in this. Your parents hold the note on your house, while you pay them off. The lawyer can structure the loan in anyway it makes sense for all of you.
posted by Ruthless Bunny at 12:09 PM on June 5, 2014 [1 favorite]

As long as your parents don't mind some paperwork on their taxes, they can easily make you a mortgage loan. It works just like a regular mortgage, not a gift - they would have to declare the interest you pay as income on their taxes (and you'd probably get to deduct part of it, should you itemize).
posted by RedOrGreen at 12:09 PM on June 5, 2014 [2 favorites]

Response by poster: Okay, a real estate lawyer, great. My parents have a lawyer they've used from time to time. Maybe he could recommend the right person, if he isn't the right person himself...
posted by toomuchkatherine at 12:16 PM on June 5, 2014

Yes. Special rules apply to family mortgages (search for 'intra family mortgage'); the minimum interest rate currently is 1.97% but it does fluctuate. You'll want to contact a knowledgeable local title company or real estate attorney to have papers drawn up.

Source: I closed on some real estate funded by Bank of Mom on Monday.
posted by workerant at 12:16 PM on June 5, 2014 [6 favorites]

former real estate lawyer/broker here, it's absolutely doable, but as has been noted, special rules apply and the IRS regards anything lower than a certain interest rate as a gift. both parties should have their lawyers sign off on it.

also, relationship consequences, particularly in a future prospect of default. a good relationship will take this into account and weather it, a bad relationship could blow up like a cherry bomb in a bag of feces.
posted by bruce at 12:29 PM on June 5, 2014 [1 favorite]

I did the same. The real estate lawyer who did the closing tossed in the contract; it's not much paperwork. I tracked it on a spreadsheet and wrote up a 1099 (so mom paid taxes on interest earnings) and 1098 (so I could deduct interest paid) at the end of each year. You'll get the specific instructions from the lawyer and you should follow them to be safe, but in reality, as long as you set a nontrivial interest rate, actually make the payments, and do the tax treatment accurately, I can't imagine the IRS wasting their time with you.

If you ever do have problems repaying, you then might want to consult a lawyer about whether it should be recharacterized as a gift, but unless your parents are really rich (planning to give away more than $5 million), even that wouldn't have any tax consequences, only extra paperwork.

Extra bonus: Sellers might prefer selling to you because they might see loans from families as likely to run into problems than bank loans. They might, however, want to see evidence from your parents that they actually have the money before selling to you.
posted by Mr.Know-it-some at 12:40 PM on June 5, 2014

Response by poster: This all sounds good. I also ran across National Family Mortgage, which sounds like they make it nice and easy, though they do charge about $6,000 over the life of the loan for the privilege.
posted by toomuchkatherine at 12:53 PM on June 5, 2014 [1 favorite]

The real estate/business attorney I work for handles the paperwork for similar transactions all the time, for a reasonable flat fee. This should be no big deal.
posted by Safiya at 12:56 PM on June 5, 2014

Mod note: Heya, NationalFamilyMortgage, a quick clarification is fine but 400+ words about your general service structure reads more like an out of place ad than an answer.
posted by cortex (staff) at 3:50 PM on June 5, 2014

Since Cortex blocked our detailed response to Katherine's suggestion that we charge clients $6K, in short, we charge a one-time fee of $725 with OPTIONAL loan servicing that could total $6K over a 30 year life of a loan.
posted by NationalFamilyMortgage at 4:00 PM on June 5, 2014

Your parents shouldl take a mortgage so you can deduct the interest.
posted by jpe at 4:55 PM on June 5, 2014

Definitely find a real estate attorney. You will need one anyway to go over the contract & close on the house, so you might as well find one now. Make sure that before you retain him/her that s/he can do the loan paperwork for you.

(I work for a real estate attorney and we do these sorts of things often - we represent the child who is purchasing a home in addition to the parent(s) who is making the loan. Once you find an attorney, they will discuss with your parents the loan details, including term, interest, repayment options, etc. There are lots of options and you really need the assistance of a real estate lawyer who does this kind of transaction regularly.)

Where in NY are you? (if you're still in NY, as your profile indicates)? If you are in Manhattan, I might have a name or two I can give you, but if you happen to be in the Hudson Valley area of NY, then I definitely have names for you. MeMail me if you'd like possible suggestions!
posted by firei at 6:41 PM on June 5, 2014

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