Q: I loaned a family member some money to renovate his house. He has not repaid me yet but says he will pay me back over the next few years. We signed a simple letter about the loan. Can I put a lien on his house to be protected?
A: In my law practice, a sizable minority of the cases I handle involve family members or close friends fighting over money or property. In almost every situation, the money was borrowed and lent with the best of intentions. For some reason, people think that a thorough contract is unnecessary when transacting business with a loved one. Nothing could be further from the truth.
One of my favorite sayings is, “If you can say it, you can sign it.” A properly drafted agreement helps the participants think about the consequences of what they are doing. By having a better understanding of each other’s expectations, a contract helps avoid problems down the road. If an issue does come up later, there are no surprises when it comes to enforcing the agreement which lessens hard feelings.
Of course, no contract can make everything OK, but anything that diminishes the sting, and helps preserve a relationship, is worth doing.
You should be very careful when putting a lien, or mortgage, on someone’s house as collateral for the money you are lending. Both federal and state law places restrictions on mortgage loans, even to family members.
Many factors will need to be considered regarding the details of your mortgage loan to decide what hoops need to be jumped through to comply with the law.
For example, you may need to analyze your sister’s ability to repay the loan or your son’s debt to income ratio. If you fail to do this, and it becomes a problem later, you may be fined, or have the loan become unenforceable.
If you are intent on making such a loan, you need to make sure it is appropriately structured and should consult with an experienced professional to find out what you can and cannot do.