How do I seller finance from my mother in law?

[Account Closed]

The one property is worth $400,000 she owes $168,000. I want to work out a deal where I am able to able to retain her interest rate of 2.75% while having it make sense for her as well. I have the ability to pay her a lump sum of $100,000 up front and take over her payments. I would then propose giving her something like $1000 a month to pay her off on the remaining $132,000 equity which would take exactly 11 years. I would need to propose this to her, but first want to figure out how to to protect us both? I understand that you would typically create some type of promissory note? At what point would I take title, once both the loan and our agreement has been paid in full?

[Don Konipol]

The reality is that there is a due on sales clause in almost every residential mortgage.  When the warranty deed is transferred the seller has violated this clause in the deed of trust or mortgage, and the borrower can call the not due in full, if he desires to and if he finds out.  In reality few die on sale clauses are ever invoked. However, when rates rise significantly lenders may begin invoking the clause.

You have a number of somewhat different ways to accomplish the transaction.  You purchase the property for $400,000, which includes purchasing it ‘subject to ‘ the existing $168,000 1st mortgage. You pay $100,000 down payment, and a new 2nd lien note is created for $132,000 to which you are the maker and your mother in law is the note holder.  Said note is secured by a deed of trust or mortgage, in second position. 
An alternative is to create a note for $300,000 which “wraps” around the existing $168,000 mortgage.

Use a title company.  Both to insure title, and to act as escrow agent.  The title company will have, or use a real estate attorney who can draw up the note, deed of trust or mortgage, warranty deed, and any other state specific forms they deed essential to the transaction.

Numerous methods exist to ensure payments made to the current lender.  Since it’s your mother in law you can pay her and have her pay the note holder on the current lien.  Or she can give you her log in information and you can pay on line, where she can also access the site to see you’ve made each payment.  There is also a method of using 3rd party note servicers if desired.  No technique is perfect.

If worst case scenario develops and lender does become aware of and chooses to enforce due on sale clause, almost all states provide sufficient time to obtain a “take out” loan.  Often the existing lender will offer a new loan to you at the current market interest rate.  With as much down payment as you’re putting down I think the transaction is relatively low risk, and I wouldn’t hesitate to to it.