Question
my daughter and her husband want to borrow 10k, I am going to loan them the money from the credit line on my house. (i am a widow on ssi). they need the money for a down on a house. her husband says i must gift the money to them. and after they will sign a deed of trust. this dosent make sense to me. how to i protect myself.
Answer
My colleagues who practice in real estate might want to jump in. Generally, unless there's an emergency, I would think it's a bad idea to tap into a credit line on your house because, if they were to default on your loan, you would be left to pay off your own credit line from your small fixed income.
If you still want to do it, you should have them sign a loan note with specific terms of the loan, i.e. perhaps $278 per month for 36 months, plus interest at whatever rate you want to set it at, maybe 3%. Include their signatures on a deed of trust. That might become worthless, though, if they were to have no equity in the house they're purchasing and you needed to foreclose if they were to default. You probably would not want to let your desire to help overshadow your own financial security.
Answer
Your son-in-law is probably tell the truth. It is very common for real estate lenders to have very stringent underwriting requirements, including elimination of ALL debt. The theory is that they are making a large loan and they don't want the borrower to tied down with other payments like a $10,000 loan owed to you.
It is certainly possible to draft a promissory note and deed of trust after they complete the sale if your daughter and son-in-law will cooperate. However, you need to be very careful about this. If they do not pay you back, you will still be stuck paying back the loan that you took out on your line of credit If you do not make the payments on your line of credit, your home could be at risk.
Answer
Your instincts sound good. My first reaction on reading your query was "just say no." A gift is something that doesn't have to be paid back, so you would have no recourse for getting the money back and you could not enforce a lien. Once the gift is given, you could not later set conditions on it and it would be up to your daughter and son-in-law's generosity if they wanted to return the money (and they could do so on any basis they wished). Meanwhile, you would have to pay back the line of credit you borrowed.
If you wish to loan them money and have them sign a promissory note with a payment schedule, there's no legal reason why you couldn't do that. It is not uncommon for home buyers to get a "purchase money mortgage" to cover the down payment, which it sounds like is your intention here. Some banks may have restrictions on that, for example, they may require that your loan be "subordinated" (meaning that it is in second position after the bank's in case of foreclosure) or they may charge a higher rate of interest on their mortgage since the buyers don't have any "skin in the game." If your loan isn't repaid, you could repossess the house (probably the bank would step in and buy you out at that point to preserve its interest).
Keep in mind that your daughter and son in law are looking after their interests, not yours, and you need to look after your own interests. If you decide to proceed with making this loan, you should consult with a competent real estate attorney to draw up the papers for you. He/she can coordinate with the bank's requirements. (The cost of the attorney, and any other costs you have in doing this, are paid by the borrowers.)
