Family & Friends' Mortgages

By
Real Estate Agent with Shinsky & Assoc

Family & Friends' Mortgages

It all seems perfectly reasonable: one person is not satisfied with what he can earn currently in the market and another wants to find the most attractive mortgage to purchase their home. It can be a good match but the IRS has specific rules that govern the transaction.

The loan must be done in a business-like manner with a written note specifying the loan amount, interest rate, term and collateral. IRS requires that the mortgage be a recorded lien in order to allow the interest deduction.

 

Sometimes, these friends and family situations have a less than normal interest rate on the mortgage. However, the rate charged in the note is regulated by the minimum applicable federal rate which is published monthly by IRS according to current Treasury securities. For October 2011, the rate is 2.95% for terms over nine years.

The seller must report the interest paid to them along with the name, address and Social Security number on schedule B when the buyer uses the property as their principal residence.

A mortgage between family and friends can be good for both parties. It may allow the borrower a slightly lower rate without the expenses of a traditional lender while giving the note holder a higher rate than they can earn in available investments. Your tax professional can guide the transaction whether you're a buyer or seller and your real estate professional can help arrange to have the documents drawn and filed.

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Comments (2)

Stephanie Stringer
First Choice Loan Services NMLS#210764 - San Antonio, TX
Mortgage Loan Originator

Good information to know.   By the way Nita, I use to live in the Denton area so I know where the BIG town of Azle is!  Take care.

Nov 01, 2011 05:20 AM
Nita Shinsky
Shinsky & Assoc - Azle, TX
Broker, GRI, SFR, e-Pro

Denton is a great town. My sister in law use to live in Aubrey. It amazes me when I meet people from other places when they actually know where my town is. We are still so small but appear to be spreading the word on where we are. We are almost on the map :-)

Nov 01, 2011 05:47 AM