This Week's Q & A

Q: I am in the process of selling my home. My son, who lives with us, is looking for a house of his own. Since it is unlikely that he will be able to qualify for a loan with his current income, I am planning to use the proceeds from the sale of my house to provide my son with a mortgage until he can obtain financing on his own. I will, of course, hire an attorney to draft the appropriate loan documents, but could you point out some of the major potential pitfalls of which I should be aware?

A: Your plan to hire an attorney is definitely the appropriate first step in this transaction. You might also want to suggest that your son have an attorney representing him, as well – not because you would try to take advantage of him, but because your interests and his won't necessarily coincide now and in the future.

There are a number of financial as well as legal considerations in this transaction, and your attorney will no doubt cover this ground with you. The obvious risk is that your son will default on the loan. Aside from the awkwardness (to say the least) of foreclosing on, and possibly evicting, your own son, there is the practical problem of taking possession of a property you may not be able to sell at all, or, sell for enough to cover the outstanding debt. This is a risk for any mortgage lender and I'm not sure there is anything you can do about it, except anticipate the worse case and think about what steps you will take should it materialize. You should also pay careful attention to the resale prospects of the house your son selects. It seems to me that your role as financier entitles you to have something to say about his choice.

Another risk for you is that your son's financial circumstances may not change significantly over the next several years. That could be a serious problem if you are counting on having the loan paid off in a specified period of time so you will have the cash available for some other use—for example, to purchase another residence for yourself. What will you do if your son can't refinance when the loan is due to be repaid? Will you simply extend the loan at the current rate? Roll it over under new terms, to be set at the time? Demand payment and foreclose if he can't comply? You should decide now what your options will be. Be realistic about your willingness to exercise the options you identify, as well as about your willingness and ability to live with the consequences.