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A DIY MOrtgage?

Chris Farrell Jul 2, 2008

Question: Dear Mr. Knows-a-lot-about-financial-stuff,

My niece and her new hubby are looking to buy a house, and are well-qualified for a mortgage. She does not like the idea, however, of all of their payments going to a bank and would rather “keep it in the family” by arranging a private mortgage with me. Are there established reliable brokers who can manage the loan as if it were an arms-length standard mortgage that just happens to use me as the lender? How much work would I personally have to do in the long run? 😉

I can well afford the up-front loan amount and have good confidence in their financial discipline to pay. Also, I have an excellent accountant who is professionally conservative but used to goofy financial arrangements. Sincerely, Noelie. Austin, TX.

Answer: It isn’t a goofy financial arrangement if you have the money and you trust your niece. However, there’s the wisdom of the financial ages behind the standard caution of don’t lend substantial sums of money to family members. It can lead to a lot of heartbreak.

That said, if you’re still determined to go ahead with the loan, it’s easy to do. There’s no need to work with an outside broker. Instead, hire a knowledgeable real estate lawyer to both draw up a legally binding loan contract, and to make sure that the title and other ownership issues are dealt with properly. Charge your niece a market rate of interest on the mortgage (so you don’t get into any trouble with the IRS). Have her set up automatic monthly payment from her checking account into yours. The home is your collateral if she ever stops making payments. Good luck.

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