How to avoid problems with family transfers

THE BALTIMORE SUN

Our daughter wants to buy a house we own and she lives in, using what she calls a family transfer of deed. What is it, and what are our responsibilities in this type of transaction? For example, what happens if she is not able to make the payments? We are seniors and do not want to enter any type of agreement that has the potential of being a problem later.

A family transfer deed generally refers to a "no consideration" deed between close family members. There might be an exemption from state and local transfer and recordation taxes for this type of transaction.

Before transferring your home to your daughter, you are wise to consider potential problems. Each family's situation may be different, but I'll mention some frequent concerns.

Is there an existing mortgage on your property? If so, the safest course is for your daughter to obtain a mortgage loan so that your mortgage can be paid off when the property is deeded to your daughter. Otherwise, you will still be liable to your lender should your daughter default in making future mortgage payments.

How will your daughter finance the purchase from you? Again, the surest way to avoid a problem is for your daughter to obtain a new loan in her name and pay you in full. If you finance all or part of the purchase price, you definitely should secure your loan with a first mortgage on the property. A mortgage constitutes a lien on the property, which would give you a priority over other potential creditors of your daughter. Of course, if you finance all or part of the purchase price, there is a risk your daughter might become unable to make the payments to you. You then would be in an awkward position of having to enforce the mortgage against your daughter.

If your daughter obtains a mortgage, what would happen if she can't make the payments? You might have to step in and bail her out by making her mortgage payments. Otherwise, the mortgage lender could foreclose and your daughter could lose the house and her investment.

Before deeding the property over to your daughter, you should carefully review her finances with her to make sure she is financially able to meet the obligations of home ownership.

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