I want to set up a mortgage with my mother. She’s not the seller of the property — she is a third party who will lend me the money to buy a home. Does Dodd-Frank apply to us? A private mortgage between a mother and daughter: What do we need to do to be in compliance?
The good news for you is that you probably don’t need to worry about Dodd-Frank or many other laws that apply to “professional” lenders such as mortgage companies and the like. The Dodd-Frank law covers banks and other lending institutions. You should be in the clear there.
However, you will need to comply with any other laws in your state. Some states have enacted laws to protect borrowers and, in some instances, even loans between family members might require passing certain tests. You also will need to make sure that you file or record the proper documents.
From a bird’s-eye view, you should hire an attorney to assist you with the documentation. You will need to sign a promissory note and a mortgage or trust deed. The promissory note is evidence of your obligation to repay the debt, and the mortgage is the document that secures the loan and gives the lender the right to foreclose on the loan in case you default on it.
Some states require certifications relating to the loan; others have mortgage taxes on the filing or recording of the mortgage; and still others require the format of the mortgage to follow certain guidelines.
For anyone who is going to lend money, it’s important to document, in writing, exactly what the terms are of the agreement — even if you’re lending money to a close relative. You’ll want to write down the amount that is being borrowed, what the interest rate is that you are charging the borrowers, and what the timetable is for payback of the loan. The document should also note that the property is the collateral for the loan, and you’ll need to follow the format required in your state for the mortgage document or trust deed.
The document should be signed and dated by the borrower, and you will need to file or record the document at the local recorder of deeds office or other office responsible for the filing of real estate documents.
Unless you are an attorney (and even if you are), we recommend you have a real estate attorney draft up the note and mortgage document so that it complies with all applicable laws. Good luck.
Ilyce Glink is the creator of an 18-part webinar+ebook series called “The Intentional Investor: How to Be Wildly Successful in Real Estate” as well as the author of many books on real estate. She also hosts the “Real Estate Minute” on her YouTube channel. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact them at ThinkGlink.com.