Q: I’m a parent. Can I loan money to my child to buy a home in Colorado? Can I secure the loan against the property? What do I need to do?
As of August 2016, the answer is “yes” – parents can loan money to their children to buy real estate in Colorado and they can secure the loan with a deed of trust against the property, all without needing to involve a licensed mortgage loan originator.
Current Law
As things stand today (June 2016), Colorado law does not permit parents to make a loan to a child that will be secured by the child’s residence without either: (i) the parent having a Colorado mortgage loan origination license, or (ii) working through a licensed Colorado mortgage loan originator.
Inquiries about loans from the Bank of Mom and Dad arise in a number of ways:
- A child wants to buy their first home and doesn’t have the credit history or income to qualify for a conventional loan.
- In the especially-competitive Denver / Boulder starter home market, parents offer to loan their child purchase money so the child can make a cash offer, which – all else equal – is viewed more favorably by sellers than offers with appraisal and loan contingencies.
- The child can qualify for a conventional first loan for 80% of the value of the property, but needs money for a down payment, so the parent will make a loan secured by a second position lien against the home, behind the conventional first lender.
- Parents have cash that isn’t making money in a savings account, they don’t want to invest it in the uncertainty of the stock market, and would be content to receive a fixed return of four or five percent on a mortgage to their child.
As currently written, Colorado law says that any person who “offers or negotiates terms of a residential mortgage loan” is considered a “mortgage loan originator.”(E1) Note that there is no requirement in the statute that the person making or negotiating the loan receive any compensation for doing so.
Anyone who is considered a “mortgage loan originator” must have a state mortgage loan origination license or make the loan through someone who has their license, unless an exemption applies.(E2) As things stand today, there is no exemption for parents to make loans to their children to purchase a home.
Changes Coming
In early 2016, the Colorado legislature introduced a bill designed to modify the state’s mortgage loan originator laws, primarily to ensure that Colorado’s laws tracked more closely with applicable federal laws.(E3) As part of the bill, language was added to exempt parents from needing to involve a licensed mortgage loan originator to broker a residential loan to their child.
Specifically, the bill says that with respect to residential mortgage loans, a mortgage loan origination license is not needed by “A parent who acts as a loan originator in providing loan financing to his or her child.”(E4) Governor Hickenlooper signed the bill into law on April 21, 2016, to become effective on August 10, 2016.
Note that this licensure exemption is narrow and only applies to parents who wish to make a loan to their child to purchase residential real estate, where the loan will be secured by the property. It does not apply broadly to any intra-family loans or other private lending scenarios.
Conclusion
Beginning in August 2016, parents will be permitted to make loans to their children to purchase a home in Colorado and secure the loan against the property without being or involving a licensed mortgage loan originator. This exemption is similar to the exemption that already exists under Colorado law for seller financers who act as the lender in owner carry situations.
Our law firm routinely assists private lenders in negotiating loan terms, preparing loan documents, and complying with applicable federal and state laws. The instruments to document a parent-to-child loan are substantially similar to those used in seller financing scenarios, which I discuss in detail here.
If you are considering making a loan to your child to buy a property in Colorado, you should consult with an experienced residential real estate attorney before your child makes an offer on the home they’d like to purchase. Please contact me to discuss the specifics of your situation.
Endnotes:
(E1)C.R.S. § 12-61-902(6)(a)(II).
(E2)C.R.S. § 12-61-903(1)(a).
(E3)House Bill 16-1306.
(E4)C.R.S. § 12-61-904(1)(b)(II).
