Can You Help by Buying a Relative's Loan?

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March 6, 2000

"My niece recently purchased a home and I want to help her by buying the mortgage and charging her less than the 8.5% interest she pays. Its an FHA loan and I think she pays some bank. Can you tell me how to purchase the loan and become the lender?"

Lenders are not receptive to selling individual loans, even if they own them free and clear. To them, it is more trouble than it's worth. Furthermore, most new loans today are securitized -- they are placed in pools against which securities are issued and sold to investors. Loans in collateral pools cannot be sold. New FHA loans almost always end up as collateral for mortgage backed securities guaranteed by the Government National Mortgage Association.

But FHA loans can be paid off without penalty. Take a second mortgage on your niece's house at the lower rate you want to charge her. She can then use the proceeds to pay off the FHA loan. Repayment of the FHA loan will convert your second lien into a first lien. But please hire a real estate attorney to help you.