Be Your Own Mortgage Company by Phil Runyon

Be Your Own Mortgage Company

How many of us have been to a mortgage loan closing where our eyes glazed over at all the forms we had to sign - and all the fees we had to pay?  Many lenders even have a form that says if they've made any mistakes, we'll sign a do-over form.  Wouldn't we all like to have a mulligan if we screwed something up?  I bet that Olympic hurdler who tripped over the very first one would like to have said, "Why don't we just start this thing over - I wasn't quite ready to go."  And the fees are for stuff like a flood insurance certificate, even when everyone knows the property hasn't flooded since the last ice age.

The other half of this rant is about getting approved for the mortgage in the first place.  If you haven't been working for the same employer for at least 2 years, you can forget about the lender taking your current income into account, and if your income is irregular because it's based on commissions or other fees for service, you might as well be on food stamps for all the consideration that's going to get you.  My apologies to the bankers on this list, but they may have been in the same boat themselves. 

Which brings me finally to the point of this.  Because our children and grandchildren are having a terrible time getting mortgages these days to buy a house or, heaven forbid, to do something harebrained like starting a business, we should consider being their mortgage companies.  What I mean is that if we've got cash languishing in a CD or money market account that's paying nano percent (or is any place else that's doing us no good, like under the Tempur-Pedic), we could loan it to our offspring at, say, 3-5%, and make it a win-win for everyone.  The kids wouldn't have to run the loan application gauntlet and pay all the fees, and we could get a better return on our listless funds.  Even if our funds are tied up in investments we can't afford to sell, we might consider a low-interest portfolio loan from our brokerage firm, and loan those funds to the kids at a comparable rate.  

There are a couple of things to watch out for, though.  It really needs to be an arms-length deal, even though you plan to have Thanksgiving together.  The loan obligation should be documented in an official promissory note that provides for the interest and the payments, and you should hold a mortgage on the property itself.  That's not because you'd foreclose if the kids were late with a payment, but because if they got into financial trouble - someone sued them after a motor vehicle accident or they went bankrupt or got a divorce - you'd have a legal basis for getting your money back before anyone else got theirs.

Of course, we can also make annual exclusion gifts to the kids ($13,000 per person), but if we can't afford to do that, or if we're already doing it and there's a need for more (most houses cost a bit more, even these days), we should consider the private mortgage option.  So put on your green eye shade, drive a hard bargain on the interest rate and payment terms if you want, but do like the old TV show and keep it "all in the family."  OK, maybe that's a flawed analogy - Archie Bunker would never have made a loan to Meathead!

(Posted August 20, 2012)