More and more people are turning to family, friends and loved ones to secure loans for the purchase of a new home.
If you have had problems securing a loan from a bank, or if you just don't want to get involved in the mortgage programs that banks offer, you may have the option of borrowing from family, friends and loved ones. If you can pull it off right, everyone can end up winning. You may be able to get the loan you need at an interest rate that you could have never received from a bank. In turn, the people you borrow from may be able to get an interest rate better than even the best savings account can offer.
These loans are often referred to as "private home loans," or an intra-family loan, and are not as uncommon as you might imagine. They are almost the same as a mortgage that you could get from the bank or other lender in many respects.
Just like with those more traditional loans and mortgages, you will probably have to sign several documents that go along with the private home loan and also agree to make payments each month, with interest. Like a bank, your private lender will hold a lien on the home you buy, and if you fall behind in your payments, they have the right to demand payment in full. In addition, just like a bank, they can foreclose on your property, or ask you to sell in order to make good on the outstanding balance of the loan.
Like with a bank, you would also have rights against the private lender as well. When borrowing from family or friends, your lender could not ask for full payment without just cause (not if, for example, you missed your grandmother's 80th birthday).
Benefits of a Private Loan: Borrower
There are several benefits that you may get by opting for a private loan from a friend, family or loved one that you may never get by going to a bank. These could include:
Benefits of a Private Loan: Lender
In addition to benefiting the borrower, a private loan also bestows benefits to the private lender. These benefits could include things like:
The Paperwork for a Private Loan
If you have come to an agreement with a friend, family or loved one to have them finance all or a portion of your home loan, you should treat it just as a bank would. To this end, you should draw up the necessary paperwork, such as a promissory note and various documents that go along with a mortgage. In addition, you may want to think about putting down a proposed repayment schedule in writing.
After You get the Loan
Just like with a traditional loan, if you run into problems in paying off the loan, you should be sure to contact your private lender as soon as possible. Because your lender will be family or a friend, you may be able to work out a solution, perhaps even forgive some payments on the loan. You should try not to take advantage of this in excess, however, as it may place significant strain upon the relationship between you and your lender.
Financing a New Home? You May Want to Speak With an Attorney
Buying a home is the biggest transaction you will likely make in your lifetime; and while it's considered a "good" form of debt, it's still a huge commitment. You may encounter multiple legal issues when closing on a home sale or securing financial resources, even if you're able to procure home loans from family and friends. Consider speaking with a real estate attorney near you to learn more.