Our loan was completely secured and filed with the county. Our lawyer advised us on all the terms but the title company actually drew up the necessary documents and handled the filing. They were very helpful and it was a very smooth transaction. As the lienholders, I believe we were listed as additional insured on the homeowners and flood insurance policies. When the kids paid off the loan, I remember sending some kind of document to the county to confirm the mortgage was satisfied.
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That’s what I would have done.
My mother did something similar for my brother for major house remodelling that included making a mother-in-law suite. They hadn’t finished paying it off when she passed away so we all got to see how much smaller his share of the inheritance was. While we never had to do this we had to have our parents rent our old house for a month so that we had time to renovate our new one as the bank would not give us a bridge loan. We didn’t always get exactly the same help, but we got was helpful at the time.
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In my opinion, an attorney isn’t needed.
The essential elements are:
A trust deed recorded against the property
Title insurance
A Promissory Note
The Note should specify the interest rate, payment amount, monthly payment due dates, ending due date, and specify if taxes and insurance will be paid monthly (to you, for you to pay when due) or paid as they come due (by him).
The title company handling the sale should be able to help with all this.
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OP has mentioned that there is another adult child. In that case, I think an attorney is essential, not optional.
The world is filled with siblings who do not speak over some perceived inequity in how a parent handled a bequest, or how one siblings inheritance had unexpected tax consequences which the others did not. I don’t think the OP wants to add two more siblings to the pile.
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1.Some states use Deeds of Trust, some use mortgages. We don’t know what state the property is in.
2.Title insurance is purchased by the seller to give the buyer a warranty deed. It just insures that the property is unencumbered or lists what those encumbrances are (easements, mineral rights, utility lines, HOAs, hopefully no liens). It can list the lender (OP) as a beneficiary of the policy.
3.The title company is not going to provide the promissory note. It will oversee the signing of the note at closing, but will not draft that note. I think the OP needs a lawyer to draft the Note unless they feel confident it using a standard on off the internet. It needs to be state specific for where the property is located.
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Attorney? Or counselor? I see no legal issue with transacting business with an adult child.
Also, if it were me, I’d limit the term of the loan. Five years seems reasonable, but anything that works for both parties. The parent can always extend if they choose, but it seems risky to lock oneself into an indefinite 4% yield.
What if inflation and interest rates soar, or if money is needed for long term care?
A worthy consideration, but my kids are in the loop on everything and the kind that would want to help each other out first. They understand the endline might not look equal. One property may end up more valuable than the other. One might have more tax responsibility. So, I’m not sure an attorney is essential on that account. My accountant is in @sherpa’s camp. I’m talking with my son and still deciding what we actually need and what seems the best way to execute the paperwork. When I transferred property to my daughter, I used an excellent paralegal who drafted all the paperwork and recorded everything at our courthouse. A simple transfer. I thought I might go that route again. However, I hear my father’s voice in my head, and I may spend the money with a lawyer to make sure I’ve covered everything.
And, yes, I was thinking of limiting the term of the loan.
I’m learning a lot!
An attorney whose firm does both real estate and trust/family law would be my suggestion. You can disagree.
I know several cases where the parent- with the best of intentions- ended up with a markedly lopsided estate division. It is easy to assume “Kid A is getting my IRA worth $200K. Kid B is getting my paid-off condo worth $200K” and therefore the division is “equal”. But without understanding the tax implications of an inherited IRA (vs. the earned IRA, which is what the parent has…. but it will convert upon death) etc. is it not clear that the estate is “equal” in its division. How you treat the mortgage payments if the parent dies in year 2, how the parent handles a true hardship case (the adult child becomes disabled but their disability insurance is not enough to cover the mortgage payments), etc. ought to be hashed out with someone who has done this before.
My opinion.
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Owner’s and Lender’s title policies are two distinct items, and both are crucial. The owner needs a policy and the lender needs one too.
As an occasional lender I always insists on lender’s policy. And without it, once I would have suffered a $435,000 loss, plus legal fees. With insurance, the legal fees were covered and the insurance company paid back my full loan amount.
And the Note is a simple document. Sometimes a title company will provide a template; if not, I’d go to the internet.
But that’s me.
Good information. Thank you!
The level of help you need depends, IMO, on the size of the loan. If you are lending them $50k, it may not be as important as if you are lending them $500k. One thing that’s different about using a paralegal v. a lawyer is the guarantee behind the work (an attorney has malpractice insurance if somethings goes wrong whereas a paralegal, working independently, probably doesn’t). If you use an attorney, the work may be done by his paralegal but it’s his name on the work. Will they use a standard contract? Most likely.
The size of the loan AND its relative size to the rest of your assets.
A 50K loan if it’s 30% of your assets is going to be MORE important to your financial health going forward than a 500K loan which represents 10% of your assets.
IMO, it doesn’t matter if it’s whether it’s $10,000 or $1,000,000, you should do it right.
Recorded trust deed (or mortgage)
Lender’s title insurance policy
Mutual understanding among family members
Solid Note with limited term
Clear provision on payment of taxes and insurance
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Knock on wood…what would happen if you were to pass while the loan is still outstanding? There are many ways of handling it, but what would you want to do?
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Presumably the loan would become an asset of the estate.
This is it. This is where I’m at.
I’ve been clear that if I die while the loan is outstanding, the loan would be forgiven as part of my son’s inheritance. That would be also be noted.
I assume it would in your will and your D is ok with not getting 50% of the house/loan.
Yes, as mentioned, my daughter received property some years back from me. That is hers. And the house my son will buy via my loan will likely match that gift in the end, although to be honest, he hasn’t felt as if that would be necessary at all. He’s just been glad his sister got into a house. We don’t worry so much about an exact divide here. My IRAs and other assets will be 50/50 for the kids.
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almost always a bad deal to let banks invest your money before your bill is due. (I much prefer paying taxes and insurance myself.)
Agree. PMI is terrible, and a total waste of cash.
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