Forget all the chatter you hear about borrowing money from friends or family, getting a private mortgage has many advantages. Keeping committed to making timely payments is no different whether it’s a private mortgage or with a traditional mortgage lender. If you aren’t responsible, then this is definitely not for you.
It can be a good match but the IRS has specific rules that govern the transaction.
Setting up a loan from a family member or friend 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.
We have great resources for setting up a private mortgage…even if you already have a mortgage. Call us and we’ll get the ball rolling for you.
Greg Gorman: 239-784-2841 or Greg@TeamParadise.com
239-784-2831 or David@TeamParadise.com
Hart: 239-821-5500 or MaryKay@TeamParadise.com