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??
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
As an example of advice for seller financing, check out:
"ESTABLISH YOUR FINANCIAL CLAIM. Have your mortgage recorded in public
records to establish the priority of your lien, your financial claim, on
Lien Position is the key.
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).
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?
Rough example only.....
$ 75k Mortgage
$ 25k Credit Card Debt
$ 25k Car Note
$ 50k Hospital Bills Unpaid
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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