You don't have to be a bank or financial institution to make a mortgage loan. In this era of low interest rates and increased lending standards, more and more home buyers are turning to their loved ones (typically parents or grandparents), for help with financing. If done correctly, this arrangement can be financially lucrative for both the borrower and the lender. The buyers get the cash they need while the lender can earn interest at a rate equal to or even higher than they could have gotten elsewhere.
The amount that is financed can range from a down payment all the way up to 100 percent of the cost of the home. Additionally, the loan does not have to be finalized before the closing. For instance, says Tim Burke of National Family Mortgage in Waltham, MA, in hot property markets parents will come in as cash buyers to secure the deal, and then write the mortgage with their children after the closing.
Loans are also not limited to an initial purchase. Borrowers can refinance existing loans, or get a home improvement loan to make renovations.
Every state and county has its own set of rules on what paperwork must be completed and where it must be registered and filed, so if you are considering such an arrangement, be sure to garner the services of a local lawyer. The mortgage interest deduction on your federal income tax still applies.
While the annual paperwork could be completed by the lender, most people who enter into one of these agreements use a third party like National Family Mortgage to keep track of everything. They will process the monthly payments, maintain an escrow account for taxes and insurance, and provide annual 1098 and 1099's for tax-reporting purposes.