Refinance existing private mortgage

[Jeremiah O]

Hi,
We purchased a house 4 years ago and financed it with a private mortgage. The private mortgage is with a family member and was for 100% of the purchase price. We were looking at refinancing the loan with a bank, but since the market tanked, we owe more than the home is worth. I wanted to get a 80% mortgage with a bank and keep the remainder of the principal as a loan with the private mortgage holder. I spoke with a bank who said that the original mortgage needs to be paid off in full, therefore this is not possible. Do we have any options other than pay off the remainder of the private mortgage with cash? Thanks in advance.

[Bryan Hancock]

My suspicion is that the bank will have to agree the arrangement or else it would be some form of mortgage fraud. Your family member would have to agree to do a short sale, which may trigger it being counted as income by the IRS.

You could just do a signature loan or promissory note that isn't recorded post closing. Check with an attorney to see if that is legit. My guess is that you will have to disclose it to the lender in some form or fashion prior to closing.

Having said that there are likely lenders that will allow something like this because they will be in first position. I would try to find a local broker at your REIA meeting or a referral from that meeting that does swing loans, blanket loans, portfolio loans, INVESTOR loans, etc. They will know which small regional lenders may be interested in an arrangement like what you are describing.

Alternatively you can try to find some other private money to take out your family member's private money as a 1st and 2nd.