If you are looking to sell your home to a family member that you own free and clear, then creating a private mortgage note may be right for you.
The term private mortgage notes 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, he/she 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.
Making a Private Mortgage Note Valuable
If creating a private mortgage note is right for you, here are 5 tips that will be helpful to keep in mind:
- Interest – Even with a private mortgage, you need to collect interest. You can collect the minimum amount of interest as permitted by the government. Keep in mind, the higher the interest rate you charge, the more money your mortgage note will sell for if you decided to liquidate it to a note buyer.
- Promissory Note – Create a promissory note, which spells out the terms of the loan agreed upon between the parties, such as the interest rate and repayment period (and any special clauses).
- Deed of Trust or Mortgage – In addition to the promissory note, you need a deed of trust, a mortgage deed or some other type of security instrument depending on the state in which the property is located. This 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, then the deed of trust must be recorded with the proper local authority. Many mortgage notes 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. If there is any mistakes made by the title insurance underwriters (i.e. liens on title they did not catch in the search), the will insure the damages up to a certain amount based on the policy. Usually this amount is about one million dollars, but that can vary of course.
- Risks – While creating a private mortgage note is beneficial to you and the borrower, it’s important that you are aware of the risks involved. First off, the deal 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 him/her. You 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 county today. We know the in’s and out’s of the note buying business as well as all of 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.