It is a familiar story, particularly these days. A young adult or couple wants to buy a home for the first time but they are rejected by the banks and mortgage companies. So they call on the ever popular Bank of Mom & Dad.
Now, mom and dad might have the money to fund a down payment or even the entire mortgage but they don’t want to just give the money away. Enter National Family Mortgage (NFM). They are what I call a direct p2p lender in that they help facilitate a direct loan between individuals.
This is the original peer to peer lending that has been happening for thousands of years. Since the invention of money people have been borrowing from family and friends. It happens every day in this country but most of the time it is very informal. But when it comes to buying a house, it pays to formalize the arrangements and it actually can be a win-win for both the investor and the borrower.
Over $6.4 Million in Intrafamily Mortgages
Tim Burke, who was a former sales director at the now defunct Virgin Money US, founded NFM last year. Already, his company has helped facilitate over $6 million in loans ranging from a small $18,000 second mortgage to a jumbo $1.1 million loan. And while the interest rates will not make investors rich (the average rate is 3.94%) they still pay better than many fixed income investments today.
There is literally no middle man whatsoever in these kinds of loans. You can setup a 30 year fully amortized loan at 4.5% and the lender will receive exactly 4.5% on their money. NFM charges a flat processing fee of $599 for all loans it formalizes and that is it. There are no monthly fees so all money flows directly between borrower and lender.
There are certain minimum interest rate requirements set by the IRS and NFM makes sure you abide by the laws here. They also provide all the applicable state and federal legal documentation to help formalize the loan. They will not service the loan in that no monthly payments are handled through them, but you can elect to contract with a third party company to process the payments.
Investors Can Earn up to 6%
With a maximum allowable interest rate of 6% from a purely investment standpoint it is not a great investment. You certainly would demand a higher rate if lending money to a stranger. But if the parents have the money and their son or daughter has been rejected by the banks it is a great alternative. Many families choose not to do a 30-year fixed rate loan, but opt for a shorter term bridge loan with the idea that it can be refinanced when the borrower has a better credit score and economic conditions are better.
While NFM provide no loan servicing themselves if a family wants a more formal arrangement Burke refers them to a national loan servicing company that can provide a go-between for just $15 a month. For this you get monthly statements as well as an IRS Form 1098 Mortgage Interest Statement, just like you would receive from a bank. Burke actually recommends this for most people, it provides a financial intermediary so the borrower is not just handing over a check to dad every month and it will also help if the IRS ever questions the loan. Speaking of taxes the borrower can take a deduction for the interest paid and the investor will have to report the interest income as ordinary income.
A family mortgage is not for everyone. A financial arrangement like this may come with all kinds of family relationship complications so it should not be entered into lightly. But for wealthy parents whose kids are struggling to buy that first home it can provide just the head start their kids need.
Peter Renton is the chairman and co-founder of Fintech Nexus, the world’s first and largest digital media and events company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series. Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.