A young couple was looking at a home for the third time and had invited their parents to see it.  The dad had quickly assumed his self-appointed role as tire kicker and was talking about how expensive mortgage rates were compared to what a certificate of deposit was paying.

The next thing you know, he has the kids cornered and says to them "I have a CD coming due and if you'll pay me what I'll be earning, I'll loan you the money to buy the home.  You'll save quite a bit even from the low mortgage rates being offered."  The young couple shouts "Daddy...you're the best!"  Dad goes on to say "and this way, you won't have to worry about all those fees the mortgage company charges."

A third party lender would always record the lien to protect the mortgage but Dad may not because of the relationship with the children.  He might not even ask them to sign a note.  This could affect the interest deduction for the buyers.

Even though the young couple will be making payments on the loan, the mortgage must be a recorded lien to be a qualified interest deduction.  This situation definitely warrants professional tax advice and can be easily remedied by having the title company draw a note and mortgage and filing it with the county tax office.