Financing a Mortgage by a Family Member Part 3 of 3

By
Real Estate Sales Representative with First Weber Group Realtors

If first mortgage financing by a family member makes sense in your particular case, a first mortgage may be drafted by either a title company experienced in drafting first mortgages or a Real Estate Attorney.  It is important that both the Mortgagee ("the bank") and Mortgagor (the borrower) discuss issues of non-performance and remedies for non-performance in advance.  The Mortgagee may wish to disallow the taking of a second mortgage on the property to further protect their first mortgage position as well as to require that the monthly payments include property tax payments into an escrow account.  To protect the Mortgagee, most mortgages contain an acceleration clause that will require payment in full if the Mortgagor defaults.  In most cases the Mortgagor may be foreclosed upon if they are unable to comply with the acceleration clause.  The mortgage will outline this process in general terms and state stautes will determine the specific details related to foreclosing on a property.  If the Mortgagee has flexibility related to non-performance issues, then the general provisions that govern non-performance issues should be detailed in the mortgage.  Family members may avoid a conflict by allowing a third party to administer the mortgage and collect payments.  This will require the Mortgagee to sign an agency agreement with a third party mortgage Administrator - usually for a fee.  While conflict between the Mortgagee and the Mortgagor may be minimized by utilizing a third party to administer the mortgage, it is still likely that the emotions of the Mortgagee and Mortgagor will create family turmoil in the event of non-performance.  Because of this, it is important to have a written back up plan, such as putting the home up for sale in the event of non-performance.  It is also critical that the Mortgagee is in a position to remain financially sound in the event that the Mortgagor defaults on the loan.  In some cases a family member may wish to consider the mortgage "paid in full" upon their death.  If this is the case, a mortgage satisfaction may be prepared at the time the mortgage is drafted.  This document should be filed with an estate Attorney and may be recorded at the time of Death of the Mortgagee.  While family finanacing has many pitfalls, it may be the right option in situations where it is mutually beneficial to the Mortgagee and Mortgagor.             

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