If you are looking to sell your home that you own free and clear to a family member, then creating a private mortgage note may be right for you.
The term private mortgage note is used to refer to a mortgage note that is being offered by an individual or private party. It is meant to be used when a more traditional entity like a bank or mortgage lender is not involved in the transaction.
Instead of having your child or family member borrow from a bulky and hard-to-work-with mortgage lender, they can borrow directly from you.
When you create a private mortgage note, you will become the note holder and act as the bank, which will cut costs for the borrower while providing you with cash flow. The private mortgage will also help you save money on closing costs and private mortgage insurance.
- Collecting interest is essential to creating a private mortgage note.
- Put down all the terms for the loan in a promissory note.
- Ensure the security of the loan by drawing up a deed of trust.
- Take notes of all the possible risk involved, do your due diligence.
Making a private mortgage note valuable
If creating a private mortgage note is right for you, here are five tips that will be helpful to keep in mind:
- Interest: Even with a private mortgage, you need to collect interest. You can collect as little interest as your like, but keep in mind that the higher the interest rate you charge, the more money your mortgage note will sell for if you decide to sell it to a note buyer.
- Promissory note: Create a promissory note that spells out the terms of the loan agreed upon between the parties, such as the interest rate, the repayment period and any special clauses you and the borrower may want to include.
- Deed of trust or mortgage: In addition to the promissory note, you need a deed of trust, a mortgage deed or some similar instrument, depending on the state in which the property is located. This document shows that the loan is secured by the property and that, as the lender, you have right to reclaim the property if the borrower fails to pay. If your child or family member wishes to deduct the loan’s interest payments on their taxes, then the deed of trust must be recorded with the proper local authority. Many mortgage note firms are available to help you generate your note and the necessary paperwork.
- Title Insurance: You’ll also need title insurance to ensure there are no errors in your property records and to prevent the risk of financial loss. This insurance policy issued by a title company will ensure that the title is clear prior to transfer. They will insure the damages up to a certain amount, based on the policy, if they made any mistakes in the process (for example, liens on the title that they did not catch in the search). Usually they will insure their work for up to $1 million, but that can vary of course.
- Risks: While creating a private mortgage note can be beneficial to you and the borrower, it’s important that you are aware of the risks involved. First off, if the note is within the family, it could create family tension or result in your family member not meeting the loan payments. If your family member doesn’t qualify for a mortgage from a bank, then you probably should not lend to them. You are in a good position to know whether your family member has a well-paying job and a good credit score and makes sound financial decisions. Equally as important, don’t create a private mortgage if you can’t afford to lose the money involved.
Learning from private note buyers
Amerinote Xchange has been buying notes since 2006. We are the fastest growing loan buying firm in the country today. We know the ins and outs of the note-buying business as well as the pitfalls.
This is not legal advice, so please be sure to consult a mortgage loan originator, a loan advisor or an attorney for the best practices and compliance for a note you are thinking about creating.