patrick.net

Dunno... ask mommy, maybe?

I dont think so ....

The scenario you describe is called an "intra family mortgage" - you can google this phrase for more info.
There are companies that do the paperwork for these mortgages and the documentation needed for tax purposes in order to make it all legal, binding and above board.

I have read about http://www.nationalfamilymortgage.com/ - one such company. Good Luck.

You can, however any interest you pay them is considered their income. Also be aware that there are special tax implications on intra-family loans.

IRS typically looks at these with a lot of scrutiny because this is often used to dodge the "gift tax". So talk to a tax expert about this.

cab says

Also, if my parent holds my mortgage and is therefore “the Bank of Mom,” will the mortgage interest I pay still be a permitted tax write-off just the same as it would be if I had taken the mortgage from the bank?

As mentioned by others, the biggest thing driving all this is tax. Your parents need to charge a sufficient interest rate, and you need to make sure you're not ending up in the gift tax realm. If your parent gives you any leniency, it may count as a gift, so you need to observe the formalities very strictly.

cab says

As far as this being separated from any kind of gift, it would be written up as a fully legal mortgage and I would pay a similar rate to what I’d pay on a Fannie Mae loan. Then, since a parent is older than a child and will likely die before the child, upon the parent’s death the remaining balance due on the mortgage is deducted from any inheritance they might receive. So the child doesn’t receive any money that they wouldn’t have otherwise.

You should check on what happens upon death with an estate attorney or tax attorney. If you structure the transaction wrong, it may appear that you are trying to skirt the gift/estate tax laws, especially now that you're saying that you would deduct it from your inheritance. This doesn't have the same economic substance as a true loan, for which the payments would be shared among all the heirs. I would tread carefully, and hire good help, rather than trying to figure this out on this forum.

As for some of the tax implications, this IRS publication discusses some of them, although it is by far not complete, and you need to review more parts of the code:

http://www.irs.gov/publications/p550/ch01.html#en_US_2010_publink10009882

cab says

I am actually pre-approved by a bank, but I worry a little because I’ve heard several stories of people who were pre-approved, later not getting their mortgages approved for one technical reason or another.

Did you give them full-disclosure? Pre-approvals that result in declines later on usually result from the borrower not actually making 'x' that they claimed to, or what have you.

Pre-approval just means, "If everything you just submitted turns out to be correct per the underwriter, you will qualify for the loan." Most pre-approvals that end up declines do so because the borrowers lied to get the pre-approval letter. (or failed to disclose some germain ("technical") detail, like wage garnishments or child support dues which actually reduces their income during underwriting, or that they already own 4 properties with mortgages and reside in a different principal residence, even though they applied for owner-occupied financing on the pre-approval app, etc)

cab says

It seems to me that there are a lot of complicated rules with mortgages vis-a-vis condos or townhouses. The bank takes into consideration not only the unit itself but evidently how many units any one owner in the complex owns, how many units are rented out, whether there is any litigation going on, and several things like that. Are those things that will actually protect me in the end?, in other words, if the bank says no to a place is it also actually in my own best interest?

This is more for the bankster to make sure that the property is collaterizable. Places with massive litigation, too few owner-occupied units, etc. can be riskier collateral for the banksters.

Ultimately, this can protect you, but most people don't see it that way. For example:
1) You don't have to live in a building with defects while uncertain litigation is pending. What if you need to move while the litigation is still pending? Your property value will probably be lower because the windows are leaking, but no one is doing anything about it.
2) If the building becomes too few owner-occupied, you may not want to live there any more, and the property may be generally less desirable.
3) If one owner or a small group of owners owns many of the units, they may have disproportionate interest in the HOA and screw the rest of the owners.

The way people saw this during the most recent housing boom is "boohoo, the big evil bank is trying to prevent me from buying my wonderful new home", and when push came to shove, many banksters (seeing the fat fees they made from securitization) were willing to lend on poor collateral, since they weren't on the hook anyway.

Under traditional 30-year fixed lending, the property must serve as adequate collateral.

My sister and parents did this. They had a 3rd party draw up the documents and amortizations. They gave her part of the downpayment(5-10%?). Then my sister put down the rest for a total of 10 percent. Then my parents loaned her the 80% at 5.25% interest with a 30 year fix. This year because the rates dropped dramatically, my sister adjusted the terms into a 3.75% 15 year fix. Convenient because there are no fees involved with originating the loan and then refinancing. My parents pay taxes on the income from the interest. My sister writes off the interest on her taxes.

cab says

Is anyone knowledgeable about this procedure, and do you know which form to use for it to be iron-clad and fully legal?

Yes you can.. go a Contract Attorney to do this.

cab says

Also, if my parent holds my mortgage and is therefore “the Bank of Mom,” will the mortgage interest I pay still be a permitted tax write-off just the same as it would be if I had taken the mortgage from the bank?

Yes you can. It not need be a bank. Personal transactions are more common than you think.

You need to consult an Attorney for the contract and CPA to set this up.

cab says

Thomas, would this need to be a specialized real estate attorney?

In general, attorney who specializes in personal contracts. You will find most of the contracts relate to RE transactions.

Do a search and find some results...

http://www.mattkabak.com/lawyer-attorney-1589357.html

offers experienced legal counsel to individuals, partnerships, limited liability companies and corporations concerning complex legal transactions such as partnership, limited liability company (LLC) and other business entity formation, real estate acquisition and disposition, investor participation agreements, equity and profit sharing agreements, commercial and residential real property sale and purchase agreements, commercial leases, financing transactions, new construction agreements and buy out agreements just to name a few.

Depending on where you live, either an attorney that does real estate closings or a title company can handle the documentation. It is essential that the property be subject to an enforceable lien, and this usually means a security document (a/k/a mortgage) that is recorded in the county clerks office. The interest rate has to be at least as much as an IRS published rate for loans between related parties, which is on the IRS website. If the loan has at least that minimum rate and is secured by a lien on the property, then the IRS will recognize the mortgage as real. Result is that borrower can deduct the mortgage interest but of course the lender/parent has interest income in the same amount.

In PA, my local title company is owned by an atty who handled all my RE documentation. Fees are competetive and reasonable. Its not a complicated transaction. But in PA at least the mortgage document has to be verified/notarized.
The mortgage formalities in your locale will be known by a real estate attorney or title company.

Simple enough. Your parents have to pay the current mortgage off if there is one. They file a deed. With the lienholder at the courthouse. They can file a security deed. However that is usually ignored and kept somewhere. The county where the house is. Thats where it's filed.

It is a good idea to use a title company or closing atty. You have to have terms on the mortgage of course. You should have homeowners insurance requirements also title insurance would be a good idea. So there are several forms you might want to get to spell out everything. A title company or atty should have generic forms. Again try to use the title company nearest the county where the house is. I would get an appraiser. You might want to consider a home inspection if you don't know whats going on with the house and you have no experince in that matter.

The title company will do the amortization and figure out the payments based on the interest rate and put that all in writting for everyone to sign.

cab says

Interesting. I know the interest I would pay would be taxable income for them, but I didn’t know that there are special tax implications above and beyond that. Why would there be, as long as they declare the income and pay their taxes on it? Is it more complicated than that?

I don't know if our lovely government has implemented anything beyond that, probably best to research it or ask a tax professional. Most of it just has to do with the way the deal is structured. It can't look like it's too good of a deal or IRS will slap it with the gift tax.

Can't your folks just buy the house and simply put you on the title? I don't know how this looks to IRS of course.

repo4sale says

FANTASTIC THINKING! GO 1 STEP MORE, GIVE YOUR MOM TAX FREE OR SHELTERED % PAYMENT VIA RETIREMENT IRA ACCOUNT.

YES, HAVE THE NOTE/TRUST DEED ISSUED BY HER/HIS PARENTS RETIREMENT ACCOUNT AND YOU PAY THE RETIREMENT ACCOUNT 12 MONTHLY PAYMENTS PER YEAR. ALL PAYMENT$ ARE LEGAL FOR YOU AND PARENTS…. But! always 1, don’t default on the payments because you cannot walk away from their retirement acct. due to you stiffing your “inheritance” too…
100-200%/Year California Land TIC 1031 or cash in early 6%/yr prorated $100kMi

I'm not an attorney or an accountant and am not offering legal advice, however loans from a parents retirement account to their offspring are a big "No, No" with the IRS. If caught, it could cause your parents to lose their tax exempt status on this account and trigger huge tax consequences. This is a prohibited transaction per IRS rules.

http://www.irs.gov/retirement/article/0,,id=163722,00.html#3

cab says

Thomas, would this need to be a specialized real estate attorney?

I would recommend an estate/trust attorney or a general tax attorney. The issues here are mostly of taxation and getting the substance of the transaction right. The real estate side of things is relatively routine (buy, sell, record mortgage, etc.).

repo4sale says

FANTASTIC THINKING! GO 1 STEP MORE, GIVE YOUR MOM TAX FREE OR SHELTERED % PAYMENT VIA RETIREMENT IRA ACCOUNT.

Read what Pmac said -- that's not allowed.

With rates so low, the value of the mortgage will decrease as rates rise. Of course, this is not a securitized mortgage and won't be traded, but they'll bear a huge opportunity cost as rates rise. Thus, your parents would "lose," rather than the bank. I'd say go for it if its a short-term loan of 3-5 years, but beyond that their investment will not keep up with inflation and will lose value in real terms.

cab says

By the way, how do you make sure the title company records your mortgage? I’ve been told that they don’t always record the mortgage and that I might have to insist on them recording it. Is that true?

I'm not sure why that would be the case. If you're paying them for a particular service, they should provide the service. Do you know in what context someone told you that?

My guess is that the IRS may care for taxation purposes that you record the mortgage. Other than that, recording the mortgage mostly protects your parents by indicating that there is a senior lien on the house and that it's secured (i.e. the normal reason to record -- notice and making sure you meet legal formalities so that you can assert your rights).

If there are other siblings there may be some inheritance laws that have to be followed. The deal with the parent must not be a "sweetheart deal" to avoid taxes. But, although it is easier if there is a down payment, a down payment is not absolutely required. The parent must be treated like any other private investor. See Real Estate for Dummies topic.

franuli

You need to realize that the bank rules do protect you. I would also recommend reading Dr. Baron's book real estate investing due diligence 101. The chapters on condo's are very informative.

Also keep in mind that what is happening with condos could come back to bite you big time. If the percentage of condos not owner occupied drops below a certain percentage then banks will not loan on that property. This means you can't unload it if you need to. So forclosures are a danger here along with folks in general who need to upsize.

The other thing happening is people defaulting on home owner fees/condo fees. You make up the difference for the deadbeats. You also are subject to hefty special assessments if the property is not collecting enough money monthly to cover its costs. This could be because of mis-management or deadbeats.

The condo I almost bought had a clause in the docs that you had to pay any special assessment within 30 days or pay 10% interest!!!! Wow! The condo association had no money in the bank and it had inadequate insurance to rebuild.

This was a deal killer for me. Do your homework before commmitting to a condo!