What to consider befor
Q: My father purchased a fixer-upper for a friend and hand-wrote a mortgage payment plan they both agreed upon. Well, after a few payments, the buyers stopped making the mortgage payments. My father can live with the fact the payments have stopped but he is concerned he could lose possession of the house due to his friend not making an effort to collect. Is this a legitimate concern?
A: The first question for you and your father is understanding who owns the home your father purchased. We’ve seen situations where one person helps another but both end up on the title to the home and we’ve seen situations where your father might end up as the lender but not on title.
If your father is on the title to the property, your father is an owner of the property and shouldn’t be concerned about losing the property or possession to the home. There may be some other potential issues relating to his arrangement with his friend (who may soon be a former friend), but these aren’t as common.
What Documents to Include When Purchasing Property for Friends
So, let’s break it down. If your father gave his friend money for the purchase of the home and the friend is the sole owner of the home, then your father wouldn’t be on title. You mentioned that your father hand wrote a mortgage. Is there more to the story? We hope so. For your father to have the right to collect the money due each month and have the home as security for the loan, your father should have had his friend sign a promissory note and a mortgage note or trust deed.
The promissory note is the document that would obligate your dad’s friend to repay the money borrowed on the terms stated in the note. The mortgage note or trust deed is the document that would give your dad the right to foreclose or use the property to satisfy the debt if your dad’s friend failed to pay the debt obligation.
Your father would hold onto the original note and the original mortgage or trust deed would get filed or recorded against the title to the property. Once recorded or filed, the world would be on notice that your father has a lien or right against the property due to the loan.
Without a written note and a filed or recorded mortgage or trust deed, your dad could be in trouble. We’d like to know exactly what your dad’s friend signed. Frequently people refer interchangeably the terms note and mortgage. But you actually need both documents: a mortgage alone may not be sufficient without the promise to repay the money.
Likewise, if your dad’s friend signed a promissory note but not a mortgage, your dad could sue the friend for the repayment of the money owed but if there’s no mortgage, meaning that the house was pledged against the debt, your dad would have to sue his friend for the money and then proceed to enforce the judgment against his friend. Worse, he might have to stand in line behind other creditors and, even, another lender that might have a lien on that home.
As you can see, the issue of having the right paperwork is paramount. Next, you need to make sure you understand the legal relationship your dad has with his friend. That relationship could be as co-owners or as a borrower and lender. Each of these options could result in very different answers to your question.
As a co-owner, your dad has an ownership right to the home that the friend would have a very difficult time extinguishing. On the other hand, if your dad is only a lender, your dad might have to enforce his rights on the debt owed to preserve his rights as a lender.
As to the question of timing: A lender usually can’t sit around forever on a debt owed without making a claim against the borrower for repayment or taking legal action to force the repayment of the debt. Depending on the laws of the state in which the property is located, your father might need to take action at some point in time, perhaps within three, five or seven years, or forego repayment.
Start by figuring out what documents were (or weren’t) signed. From there, your dad should talk to a real estate attorney to go over his options and decide how to proceed.