Promissory Note Guide

STEP ONE:

Determine when the promissory note was created. If the promissory note was created prior to February 8, 2006, refer to 10.10.5 Determining Fair and Valuable Consideration. If the promissory note was created after February 8, 2006, go to Step Two.

STEP TWO:

If the promissory note was created after February 8, 2006, determine if it involves cash or property.

Go to step three if the promissory note involves cash. Go to step four if the promissory involves property.

STEP THREE:

Does the promissory note, involving cash meet all of the following rules (referred to as Safe Harbor rules)

1. 1. 1. The repayment term period must be actuarially sound (or the owner of the promissory note receive his/her investment back within his/her life expectancy).

1. 1. 2. Payment must be made in equal amounts during the terms of the loan with no deferral of payment or balloon payments.

1. 1. 3. The promissory notes must prohibit the cancellation of the balance upon death of the lender (the promissory note must still be in effect even if the lender passes away).

Go to step five if the promissory note meets all of the rules above.

If the promissory note does not meet all of the rules above, then an improper transfer has occurred and a transfer penalty may apply.

STEP FOUR:

A promissory note involving property is typically referred to as a property agreement, a deed of trust and/or a settlement statement.

A transfer of property occurs when the owner of the property has signed and dated the deed of the property, and the deed has been given to the new owner.

• • • Determine if there was a transfer
      
      • If the property has not been transferred into the name of the borrowers, no transfer has taken place. The property is a resource for the applicant/participant.
      • The date the property (deed) changed ownership is the date of transfer to explore.

• • • If the property was transferred, determine if fair market value was received using information found in 10.10.5 Determining Fair and Valuable Consideration.
    • If fair market value was received, continue to step five.

STEP FIVE:

Is the note a Bona Fide loan (or does it meet the following):

1. 1. 1. Legally valid under applicable State’s law

1. 1. 2. Enforceable under State law

1. 1. 3. Made in good faith

1. 1. 4. Effective at the time of the transaction

1. 1. 5. Contains acknowledgement from all parties of the obligation to repay

1. 1. 6. Does not offer any form of forgiveness

1. 1. 7. Includes a plan for repayment with or without interest

Go to step six if the promissory note meets the Bona Fide loan definition above.

STEP SIX:

Determine if the promissory note is Negotiable or Non-Negotiable.

1. 1. 1. Negotiable = something that can be bought, sold, exchanged or transferred

1. 1. 2. Non-Negotiable = refers to something that cannot be bought, sold, exchanged or transferred

Go to step seven if promissory note is Bona Fide and Negotiable. Go to step eight if promissory note is Bona Fide and Non-Negotiable.

STEP SEVEN:

• • • Assume the resource value is the outstanding principal balance owed on the note unless verification is provided the note cannot be sold for that amount to a third party – at that time the resource value is the amount it can be sold for.
    • The cash or property transferred to the borrower is no longer an asset to the lender, unless the lender has access to the funds/property for his/her own personal use.
    • Payments from the borrower are considered unearned income in the month of receipt, and a resource if retained into the following month.

STEP EIGHT:

• • • Promissory note is a resource of the Lender, but the resource value is $0 as the promissory note cannot be sold (non-negotiable).
    • Cash transferred to the borrower is no longer a resource unless the Lender can access the funds/property for his/her own personal use.
    • If the transfer involved property and fair market value (FMV) was received, the amount of the transfer is the amount remaining to be paid on the loan on the date of application.
    • If the transfer involved property and fair market value (FMV) was not received, the transfer is the difference between fair market value and the loan amount, plus the amount remaining to be paid on the loan on the date of application.
      • Example: Smith sold his home, with a FMV of $75,000.00, to Ms. Kelley for the purchase price of $50,000.00. Ms. Kelley still owes $15,000.00.On February 3, 2019 Mr. Smith applies for MHABD. A transfer of $25,000.00 has taken place on the date Mr. Smith transferred his home to Ms. Kelley (he did not receive FMV $75,000.00-$50,000.00=$25,000.00). In addition, Ms. Kelley still owes $15,000.00 on her loan.The total transfer amount applied to Mr. Smith is $40,000.00 (the $25,000.00 difference at the time of the sale + $15,000.00 the remaining balance of the loan).
    • Payments from the borrower are considered unearned income in the month of receipt, and a resource if retained into the following month.