Column: What is a Section 32 Mortgage

TAX TIPS (and other stuff)

By Kelly J. Bullis, CPA

2025-October 18th

I got a call from a client recently.  She was trying to help a friend out in buying their first home, a townhouse.  Her attorney warned her that she may be about to violate Section 32 rules in how she was structuring the mortgage.  She had never heard of Section 32 rules and wanted to know what they were.  So, if you are ever planning on helping out a friend or family member by loaning them money to purchase a home, knowing these rules might be helpful.

Section 32 is part of the Home Ownership and Equity Protection Act of 1994.  It is a part of regulation Z of that act.  It covers certain mortgage transactions that involve the borrower’s primary residence.  It does not apply to investment properties or commercial real estate purchases.

Section 32 is all about making sure the lender does not charge too high an interest rate.  In many cases, to help out a family member, the most often question I’m asked has more to do with how low an interest rate can they use, thus not triggering a Section 32 crisis.

Section 32 rules use a trigger-point in determining if they have occurred.  The easiest way to demonstrate this is by giving an example: Suppose you are funding a 10-year mortgage with an Annual Percentage Rate (APR) of 13.75%, and you take the application in June.  To test if the mortgage is a Section 32 loan based on the interest rate, you look up the 10-year Treasury yield posted on May 15.  Say you find the 10-year Treasury yield was 5%.  You then add 5% (the Treasury yield of comparable maturity) to 8% (first-mortgage interest rate trigger test for Section 32) to come up with 13%.  The 13.75% APR on the mortgage therefore exceeds this 13% trigger point.  Consequently, this mortgage example must now comply with the Section 32 disclosure requirements, terms and conditions.

These disclosure requirements, terms and conditions are mostly… Balloon payments can not start until after 60 months; There can be no negative amortization; The default interest rate can’t be greater than the initial rate on the loan; Usually no prepayment penalties; On-demand clauses are restricted; Can’t refinance until after first 12 months.

In the case of my client, she was offering a $70,000 loan at 10% with a 5-year balloon payment.  The US Treasury Yield was currently 4.5%, when added to the Section 32 trigger rate of 8%, we get 12.5%.  Since her loan was at 10%, her loan did not meet the Section 32 rules, so she was free to move forward without needing her attorney to prepare a complicated contract in compliance with the Section 32 rules.

Have you heard?  Deuteronomy 24:10 says, “When you make your neighbor a loan of any sort, you shall not go into his house to collect his pledge.”

— Kelly Bullis is a Certified Public Accountant in Carson City.  Contact him at 775-882-4459.  On the web at BullisAndCo.com  Also on Facebook.

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