my father would like to take a $30K home equity line of credit from us (for 3 years), offering his house as a collateral. The house has $60 equity, and still has $200K in morgage. What are the gotchas in this arrangement? If the mortgage is not paid off, we would have no rights on the property anyway, I would assume?
Oh, there are a lot of "gotchas" in your fact situation. You are lending money to a relative - gotcha. If you want to document this transaction properly, you will need an attorney to prepare a note and mortgage, outlining the agreement. Who pays for that? In a normal borrower-lender relationship, the borrower pays those "closing costs". Is your father OK with borrowing $30K, but only receiving, say, $27K because the rest are closing costs? That conversation would be another "gotcha". So you do the deal and have a note and a recorded second mortgage - does he add you as an additional insured on his homeowner's insurance? If not, you could be in for a loss if the property is damaged or destroyed. You are also holding a second mortgage - if he does not pay the first, they will foreclose, and you end up likely with just a promissory note on which to collect. Gotcha. What if he pays the first mortgage, but can't afford to pay you? Are you going to foreclose on your own father? Gotcha. If you have a remedy but are unwilling to use it, why get the mortgage in the first place? What happens if during the repayment period you have a sudden need of your own for the $30K? You don't have it and may have to look for your own loan, incurring your own expenses in the process. Gotcha. Is it safe to assume he's looking to you because he either can't borrow enough from other sources (because the house isn't worth what he thinks or they won't let him eat into his equity that deep), or his credit is shot and no one would make him a loan in any event? If the latter is true, BIG red flag for a potential big Gotcha. If he won't pay people in the business of lending money, you will be even further down on his list of priorities. Because people in the business of lending money have lawyers who can collect if they are not paid, and they know enough to follow the laws that apply to consumer transactions so they don't "step in it" in the process. You are not in the business of lending money, so you don't have a staff of trained collectors, a law firm you can send the account to, and other loan accounts that will offset a loss of this nature if you are not paid. Money problems can be a major factor in family break-ups - if you make this decision to lend him the money, you BOTH have to be in total agreement. If either of you has the slightest doubt, do not make the loan. You have not stated why he wants the loan - what does he intend to do with the money? Home improvements? Take a vacation? Generally, it is the younger generation looking to their elders for a loan, as they typically have fewer resources. Here, the roles are reversed, which makes me skeptical. Family loans in general are a bad idea. The larger the amount of the loan, the greater the potential for bad feelings which remain for a long time. Go into this with your eyes wide open - it has the potential for a disastrous result. Is that a chance worth taking? Talk to a lawyer who knows real estate, one who can get all the facts on the table BEFORE you decide to make the loan, so their advice to you is well-informed. Good luck!
You can protect yourself. If you give your father a $30,000 loan, you can secure the loan with a lien on his house. You want to be sure there is sufficient equity in his home to satisfy your lien, as you would be junior to any previously recorded lien and/or mortgage.
If I understand your question correctly, your father has $60,000 in equity in his home and a mortgage with an unpaid balance of $200,000. Is the $60,000 in equity *above* the outstanding mortgage (i.e., is there $260,000 in equity)? I suspect not, because if there was, he could just take an equity line of credit out on his own home. If he owes $200,000 and there is only $60,000 in equity in his home, your lien would be worthless, as the mortgage company has superior position and there is not enough equity to satisfy the mortgage *and* your debt.
You could still obtain security such as a promissory note, but that piece of paper is only worthwhile is your father is collectible.
Your situation sounds complex and it is probably best to talk to an attorney to make sure your interests are protected as much as possible.
I agree with my colleague. You should also contact a real estate attorney in your area regarding this issue.
You should really consult with a real estate or contract attorney. The main pitfall in 2 parties making any contract or lending agreement without an attorney is that they draft a document that cannot be enforced. You would be best protected by having an attorney evaluate the proposal, advise you of any possible shortfalls, draft the contract, and secure any liens.
The "gotchas" are the common issues in these types of arrangements. Loans between relatives can ofter create problems, especially if not repaid according to the terms. As the lender, do you really want to sue your father if he doesn't (or isn't able to) pay when due? Most people do not.
If you are certain of the home's equity value, your loan may be be secure if you take a lien against the house for collateral. Still, we've learned that property values can make sharp declines with only slow recovery. That drop in value could affect your ability to be repaid from the property value if you foreclosed on the debt. In addition, your lien position will be secondary to the existing mortgage. If the 1st lender forecloses on its loan, you will be forced to pay off that debt if you wish to maintain your lien against the property.
There are others, perhaps, but these three - loan between family member, possibility of impaired value of the collateral, and secondary lien position - suggest you should proceed with caution.
I hope this helps you. If it has, please mark as "helpful" or a "best" answer. ******************** I am licensed in Michigan and Illinois, and regularly handle legal matters of this sort. The answer provided here is based on the limited facts you have submitted Actual documents, expanded facts, and local law knowledge are all necessary to provide a comprehensive and specific answer to your questions. The opinion offered here is for your information only and no client-attorney relationship is created by this response.
You are correct in that you have little security left in the remaining equity. If the first mortgage goes into foreclosure, your lien could get wiped out. However, you can have other assets, if available, secure the lien as well. Finally, since you are already anticipating the risk, if your father no longer has a payment left after a foreclosure on the 200K mortgage, then he should have some money available to pay you back.
This advise is only being offered as a courtesy. An attorney-client relationship does not exist. My comments are based on the limited fact pattern presented by you. Do not take any legal action based upon this answer. You are strongly encouraged to seek the advice of an attorney to review your matter further.
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