I am giving a relative a mortgage on their home as I can get a higher interest rate and they can get a lower interest rate than either of us could get using a regular bank. I will issue annual 1099 forms so they can claim the interest on their taxes and I will declare the interest on my income tax. We have all the papers drafted, etc, but someone asked why we were bothering to plan to record the mortgage with the county recorder.
I was surprised, I never even thought about why, just assumed that everyone did record all mortgages. The only reason I can see for recording the mortgage is to let any future prospective purchasers of the property be aware of the fact the the owners do not have a completely clear title to the property. What am I missing??
Yeah, but if we have a signed and witnessed document/mortgage and promissory note, what is the advantage of having filed the mortgage vs each of us having a signed/witnessed/notarized document??
FIRST, if you are thinking about taking back a mortgage (family or not), the entire transaction should be scrutized by a YOUR competent real estate attorney and, if you have one, YOUR financial advisor.
As "Pat" explained, you need to establish the PRIORITY of your financial claim relative to any other claims that might ever be made on that property.
As an example of advice for seller financing, check out:
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Excerpt:
"ESTABLISH YOUR FINANCIAL CLAIM. Have your mortgage recorded in public records to establish the priority of your lien, your financial claim, on the property."
What could happen? The other poster explained some of the pitfalls of not 'protecting' your lien position.
If the person you are giving the mortgage to has any financial hardship down the road and the house gets liens on it, they will be in position to get paid first.
You, without a recorded interest (lien position) in the property, would not get any money; until those who file their suits get paid first and are in position.
You want a First Position Lien (First Mortgage).
RECORD IT!
Good luck with this journey. You have already pointed out that they couldn't get a good interest rate as it is, so that must mean their credit is already shaky. Do you really want to be left out in the cold should they go somehow further down a credit problem path?
Hospital puts a lien on house, car people decide to sue and put a lien on the house. Your buyer now decides to just go into bankruptcy, so now the credit card companies are looking to get in line.
House gets sold at foreclosure for $100k. Hospital was in line first for their $50k Car people got their $25k And the credit card company squeaked by for their $25k.
Excellent! They went bankruptcy and all creditors got paid.
Oh wait, you didn't know their was a bankruptcy until after it happened? Bummer, you would have been notified of your buyer's credit problem if you had a recorded mortgage as FIRST LIEN POSITION so you would get paid FIRST.
Rough example above, but you get the point. Hopefully....
And to add to this, your relative will tell you that he had no choice. And I think he'll be telling the truth. Once the other liens are filed, and they will be filed promptly, which could be months before the house of cards falls down, there will be no way for him to sell the house and pay you before he pays them without breaking the law. Maybe no way to do it at all.
BTW, Pat gave several examples of this problem in his reply. You need to read his reply again. as well as Erma and Tim's.
In addition to the extremely accurate information presented by others in this thread there is always the possibility of fire, high winds, deaths and a souring of the relation to consider.
It is in the best interests of both parties to this transaction to properly record and then release this mortgage when it is paid. It is only a few $ for each action.
The fact that it is recorded does not prevent you from excusing some of the debt in the future if you are inclined to do later.
A morgtage isn't your only option. A Contract for Deed is another. If everything goes right, it works the same way - at the end of the payment period, the buyer owns the property. If there's some hiccup, title remains with the seller. Even with a Contract for Deed, you should still record the transaction with your registrar of deeds.
Talk to a real estate attorney. It'll be the best $200 you'll spend.
And by the way, it's a form 1098, not a form 1099 that's filed. This is not necessary, anyway as long as you report the income on your taxes and they report the interest on theirs. The tax form has a place to report mortgage interest that wasn't reported on a 1098 form.
Thanks, I should have remembered it was a 1098, but it was very late when I posted.
I will be recording the mortgage just to establish an extra legal basis if there are ever any controversies. Since it is my daughter and son-in-law, they will just be paying into my and my wife's estates when that time comes if they have not paid off the loan. For those who cautioned me about all the pitfalls, believe me, I am well aware of what can and frequently does go wrong in family relationships.
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