TN 70 (12-23)

SI 01140.300 Promissory Notes and Property Agreements

A. Introduction

This section provides resource policies that apply to an individual who is a creditor and, therefore, owns an agreement such as a promissory note or a property agreement. A creditor is a seller of property.

See SI 01120.220 for the procedures for developing the resource value of cash loans. See SI 00835.482 for developing loans of in-kind support and maintenance.

B. Definitions

1. Promissory Note

A promissory note is a written, unconditional agreement whereby one party promises to pay a specified sum of money at a specified time (or on demand) to another party. It may be given in return for goods, money loaned, or services rendered.

2. Property Agreement

A property agreement is a pledge or security of particular property for the payment of a debt or the performance of some other obligation within a specified period. Property agreements on real estate generally are referred to as mortgages but also may be called real estate or land contracts, contracts for deed, deeds of trust, and so on. Personal property agreements (e.g., pledges of crops, fixtures, inventory, etc. ) are commonly known as chattel mortgages.

3. Negotiable Agreement

A negotiable agreement is an agreement whereby the ownership of the instrument itself and the whole amount of money expressed on its face can be transferred (e.g., sold) from one person to another.

C. Policy — agreements as countable resources

1. For the seller (creditor)

For the owner of the agreement (the seller), a promissory note or property agreement is a resource. The property itself is not a resource because the seller cannot legally convert it to cash while it is encumbered by the agreement. If payments received by the seller consist of both principal and interest, only the interest portion is income. The principal portion is the conversion of a resource so it is not income.

2. For the buyer (debtor)

For the buyer of the property (debtor), the promissory note is not a resource. However, the property purchased may be a countable resource in the month following the month of the transaction.

3. Resource value of the agreement

Assume that the resource value of a promissory note or property agreement is its outstanding principal balance unless the individual furnishes evidence that it has a lower cash value.

4. Property agreements prior to settlement

An individual who enters into a contract for the sale of real estate owns two items until the settlement of the sale is completed: the real estate and the contract. The real estate is not a resource because the seller cannot legally convert it to cash while it is encumbered by the contract. The real estate contract is a property agreement that is a resource to the seller.

D. Procedure — promissory notes and property agreements

Follow this procedure to develop the resource value of promissory notes and property agreements when the eligible individual is the seller (creditor).

1. Obtain copy of agreement

  • Obtain a copy of the agreement. Assume, absent evidence to the contrary, that the written agreement is bona fide and negotiable.

  • Cease development if counting the original principal balance as a resource does not cause ineligibility. The original principal balance is the amount owed to the creditor when the agreement was established.

2. Determine outstanding principal balance

  • Obtain evidence of the outstanding principal balance if counting the original principal balance as a resource would cause ineligibility. The outstanding principal balance is the balance in the month for which a determination is being made. An amortization schedule can be used to determine the outstanding principal balance and the interest income if the terms of the agreement are known (e.g., interest rate, payment period, original principal amount, etc.).

  • Cease development if counting the outstanding principal balance as a resource does not cause ineligibility.

3. Offer rebuttal rights

If the outstanding principal balance combined with the individual’s other resources causes ineligibility, inform the individual that we will use the outstanding principal balance in determining resources unless they submit:

  • evidence of a legal bar to the sale of the agreement; or

  • an estimate from a knowledgeable source, showing that the CMV of the agreement is less than its outstanding principal balance.

Refer to the rules for obtaining evidence in SI 00601.100 if the individual takes longer than 30 days to submit such evidence.

NOTE: Knowledgeable sources include anyone in the business of making such estimates (e.g., banks or other financial institutions, private investors, real estate brokers, etc.). The estimate must show the name, title, and address of the source.

4. Document the file

Document the agreement and your determination on the Promissory Note, Loan, or Property Agreement page. Record the information from the written agreement and any evidence provided by the knowledgeable source on the EVID screen. If the claims representative contacted the knowledgeable source by telephone, record this on the Report of Contact page or a Report of Contact.

E. Examples - cases

1. Contract for sale

Situation: Dottle, an SSI applicant, sold a parcel of land to a neighbor for $3,000 plus interest. Dottle received a $1,500 cash down payment. The real estate contract specifies that the remaining $1,500 will be repaid at 5% interest over the next 2 years.

Analysis: The farmland is no longer Dottle's resource even though it is still their property. Because they are bound by an agreement to sell that land, they cannot transfer title to anyone else. Dottle has converted their ownership interest in the land into a real estate contract. The CR determines that there is no legal restriction against converting the contract into cash, so it is Dottle’s resource. The initial value of the contract is the $1,500 outstanding principal balance. Counting the $1,500 principal balance as a resource, Dottle is still under the $2,000 resource limit. Because this contract is a resource, the principal portion of the monthly payment they receive is not income, but the interest portion is unearned income. To determine the amount of the principal and interest portions, the CR obtains an amortization schedule with $1,500 as the amount of the contract, 5% interest rate, and a 24 month payment period.

2. Installment sale contract

Situation: Little, an SSI claimant, recently moved out of their home to live in a rented apartment. They have just entered into an installment sale contract on their former home with Higgins, an SSI beneficiary. Higgins made a $6,000 down payment on the house using retroactive SSI benefits, and immediately moved into their new home in which they already have an equitable ownership interest, even though they do not yet have title. The outstanding principal balance on the installment sale agreement is $28,000.

Analysis: Resource determinations must be made for both individuals. Although Little still has title to the house, Little cannot sell it. Its value as a resource to Little is in the value of the installment contract. The installment sale contract (which the CR determines has no legal restrictions against its sale) is Little's resource in the amount of the outstanding principal balance ($28,000) unless Little presents convincing evidence that its CMV is a lower amount. The installment sale contract has no bearing on Higgins' eligibility, as either income or resources. Higgins' ownership interest in the house Higgins is buying is an excluded resource since it is his principal place of residence.

3. Reverse mortgage

Situation: Jones, an eligible individual who owns their home, enters into a mortgage contract with a local bank. Under this contract, the bank provides them with monthly payments which do not have to be repaid as long as they live in the home. These payments are actually a loan against their equity in the home and must be repaid when they die, sell the home, or move.

Analysis: Since Jones is the borrower, the mortgage contract itself is not a resource to them. Since they live in the home, it continues to be excluded from resource counting. The payments they receive from the reverse mortgage are loan proceeds so they are not counted as income.

F. References

Proceeds of loan are not income, SI 00815.350

Loans of in-kind support and maintenance, SI 00835.482

Determining the value of cash loans, SI 01120.220

Home replacement funds exclusion, SI 01130.110

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SI 01140.300 - Promissory Notes and Property Agreements - 12/20/2023
Batch run: 12/20/2023