ArcaMax

Q: My mother- and father-in-law want to act as the mortgage lender for me and my wife when we purchase a new house. We would like to help them figure out the steps they need to go through in order to document, register, and pay off the mortgage correctly, but we are having trouble getting a clear answer on how to do this. Could you advise us on the best course of action to make sure that the transaction is legitimate?

A: What a lovely offer. You and your wife will want to make sure they’re protected by getting the right paperwork in place to document the loan. For your in-laws to act as your lender, they should create a promissory note and a mortgage on the home you are about to purchase. That will protect them if something happens.

The promissory note is the document that spells out the terms of the loan, including the amount borrowed, the interest rate, the monthly payment amount, the payment due date, and what happens if you default on the loan. This note creates your legal obligation to repay the debt. Your in-laws should work with a real estate attorney to draft a promissory note that complies with your state’s lending laws and includes all necessary terms.

The mortgage (or deed of trust, depending on your state) is the document that gives your in-laws a security interest in the property. This means that if you fail to make payments as agreed, your in-laws would have the legal right to foreclose on the home and sell the home to satisfy the debt you owe to them. While this might feel uncomfortable to discuss with family, it’s an essential protection for them and makes the transaction legitimate in the eyes of the law and the Internal Revenue Service (IRS).

Once you’ve signed both documents, the mortgage must be recorded or filed with the county recorder’s office or land records office where the property is located. Recording or filing the mortgage puts the world on notice that your in-laws have a lien on the property and establishes their priority position if other creditors come along later. There will be a recording fee, which varies by county but is typically a modest amount. In some places, the recording or filing fee can be substantial, so you should understand the fees early in the process.

You should also be aware of the tax implications. If your in-laws charge you interest on the loan, they must report that interest as income on their tax returns. On your side, you may be able to deduct the mortgage interest you pay on your tax return, just as you would with a traditional lender, provided the loan is properly documented and secured by the property.

The IRS has rules about imputed interest on family loans, so your in-laws should charge at least the Applicable Federal Rate (AFR) to avoid gift tax complications. The AFR is published monthly by the IRS and represents the minimum interest rate that should be charged on family loans. For December 2025, the minimum long-term rate is 3.45%, which is far less than commercial lenders charge.

We strongly recommend that you and your in-laws work with a real estate attorney to prepare, review and sign all the necessary documents and disclosures. An attorney can ensure the loan is structured properly, complies with state and federal lending laws, and protects everyone’s interests. The cost of proper legal advice upfront is minimal compared to the potential problems that could arise from an improperly documented family loan.

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(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask (4th Edition).” She writes the Love, Money + Real Estate Newsletter, available at Glink.Substack.com. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through her website, ThinkGlink.com.)

©2025 Ilyce R. Glink and Samuel J. Tamkin. Distributed by Tribune Content Agency, LLC.