How Family Mortgages Are Making Home Ownership Possible For More People
By Robert Stitt
Chandra Webb made $37,000 as a new teacher when she got out of college. Her father, Hezekiah Webb, wanted to see her living in a nice house with a garage, but both of them were aware that she could not afford a nice home in a nice neighborhood on her salary.
Hezekiah was a retired State Farm agent who had started saving when he was young. He decided to help his daughter by joining the growing trend of Intrafamily mortgages and lending her the money for a home.
With Intrafamily mortgages, the money is not a gift or a traditional loan but an actual mortgage. There is a borrower who fills out mortgage papers and a third party institution that takes the payments and acts as an intermediary between the family member lenders and the borrower. The biggest difference, initially, is that the lender is a family member or members and not a bank or credit union. According to Timothy Burke, whose National Family Mortgage business is the leader in the Intrafamily mortgage industry, eighty-five percent of intrafamily loans are “parents trying to help their adult children.”
Burkes’ business has done more than $330 million in business since it started. The smallest loan they processed was just $11,000 and the largest was in excess of $2 million. With Burke, borrowers can do more than just take out mortgage loans, they can also refinance existing mortgages, get loans for home renovation, and even finance down payments.
In the case of Chandra Web, her 1800-square foot house was financed for just over 9 years at 1.46 percent interest, the lowest allowed by law. Even though the loans are family-based, in order to be legal, a number of IRS codes need to be carefully followed to avoid getting into tax trouble. One of the rules pertains to the interest rate that is charged. The rate cannot be lower than the Applicable Federal Rate (AFR). There are also rules on how much money family members can just give to the borrower. In Chandra’s case, the maximum allowed was $14,000 per giver. When Hezekiah and his wife each gave Chandra $14,000, she had enough for her down payment. After all was said and done, Chandra’s monthly payments topped out at a whopping $182.50.
Because the loan process is overseen by a third party and family members are involved, the loans are usually paid. This makes intrafamily loans an excellent investment opportunity for those who are in the later stages of life and are looking for an investment scheme that is not so risky. This is especially true today when most CDs and money market accounts with excellent yields top out at a paltry 1%. Most of the intrafamily loans would earn you 2.5 as much.
There are still closing costs, though they are significantly less than with a traditional mortgage loan. In fact, you could pay as little as $1,075 for a $1 million loan. The required automatic payment also comes with a few fees.
Since the loan documents are real, liens are placed on the home and foreclosure could occur if debts are not paid. On the bright side, interest can still be written off taxes. The greatest question that needs to be asked by the borrower and the lender is what happens if payments are not made or are missed. How bad is it going to affect family reunions, etc?
With the financial issues facing big banks and credit unions and the increased stringency of the loan process, intrafamily loans may catch on faster than anyone expected.