I have an employee asking for a small loan to pay his personal property taxes., he is 3 years behind on....I will loan him the money but I need collateral. How can I have him sign his house as collateral as a simple loan..problem is hes a type of employee that shows sometimes and other times takes off for weeks

I don't mind helping I just need collateral. He has no mortgage on the house as of now.

  • 3
    A mortgage is a loan using property as collateral, e.g. a house. So you don't want a simple loan. You want to make a mortgage loan. The mortgage isn't collateral. The mortgage is the loan and the house is the collateral.
    – Brythan
    Aug 15 '16 at 1:01
  • Mortgage is a French word for collateral...
    – littleadv
    Aug 15 '16 at 3:21

Obligatory "Don't do it" remarks: If the guy isn't trusted enough to even show up to work, and can't get a personal loan directly from a bank (Home Equity Line of Credit would suffice), this is really setting things up for failure. What if he quits? What if you need to fire him (you know, for not showing up for weeks)? </rant>

In order to be able to place a lien on his home should he default on the loan, you'll need to draft up a loan agreement or promissory note stating specifically that you have the right to do so. Get a lawyer involved.

Here's an article that talks about setting up a Private Home Loan, which is geared more at helping someone buy a home, but may prove useful in this case as well: https://www.nolo.com/legal-encyclopedia/borrowing-from-family-friends-buy-29649.html

It's pretty lengthy, so I won't quote it out here, but the gist of it is: Get everything in writing in a legally binding contract.

  • 1
    Absolutely get it in writing, reviewed by your lawyer (at least), properly signed and properly recorded with the government. "A verbal contact isn't worth the paper it's printed on."
    – keshlam
    Aug 15 '16 at 0:59

Assuming United States; answer may be different elsewhere.

The best instructions I have seen for this were on the webpage of one of the law firms making an organized business out of intra-family loans, but any lawyer who can deal with normal bank loans should be able to help you set this up and get it filed with the appropriate authorities to make it a legally binding mortgage. Shouldn't cost you much in legal time to do it.

You will have to charge interest; your lawyer can tell you what the minimum and maximimum interest rates would be where you are. Your interest income will be taxable. The borrower may or may not be able to deduct the interest paid from their taxes.

Of course if the borrower has any sense they'll want to get their own lawyer to review the terms of the agreement, and to tell them whether they can deduct it from taxes or not.

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