How to Navigate Having a Private Mortgage Loan from a Family Member
A private mortgage loan is a loan taken out from a lender who is not a traditional mortgage lender. Oftentimes, this means that a person is borrowing directly from a family member. Not all private mortgages are exchanges between relatives, but for many people this is the case. One of the most common circumstances behind this occurrence is when an adult child cannot be approved by their bank and the parents then step in to borrow them the money.
This is a form of private lending, also called “intrafamily” lending. And it can be the next best step if you want to get into a home of your own. However, borrowing any amount of money from family can lead to some seriously tense situations and put both people involved into a number of uncomfortable predicaments. We’re here today to help you successfully navigate this type of mortgage loan – without straining your family relationships.
Never Take More Than You Can Pay Back
While owing money to a traditional lending institution is stressful, your family relationships can’t fall apart because of it. A sibling, parent or other relative who has loaned you the funds for your home but has not been adequately paid back can quickly become bitter. They might be torn about whether or not they should firmly enforce the repayment plan originally agreed upon – which can lead to some heated conversations and stress for all involved.
If you are not 100% certain that you will be able to pay back the mortgage loan in the way the lender wants, don’t accept the loan. Work on finding another way to get the money that you need for a home, work on your credit, and try more traditional lending routes again later.
The other thing to consider – it may be wise to get a much smaller, second mortgage vs a loan for a full amount.
Make Sure to Document the Agreement
Private lenders and borrowers need to set their terms into a clear format that allows for protections of both parties. The documentation typically recommended is a promissory note and a mortgage document.
Promissory Note
The borrower signs a note that states their agreement to repay the loan upon the terms determined between the borrower and the lender. This note should also detail:
The interest rate on the loan.
The expected payment dates.
The frequency at which payments will be made.
Penalties for falling behind on the loan’s repayments.
Mortgage Documentation
This type of documentation secures collateral in the event that the borrower is unable to continue making on-time payments of the loan. This allows the lender to foreclose on the property and resell it to get their money back.
The document should also include what the borrower is responsible, such as:
Paying the principal, interest, insurance and taxes on-time.
Maintaining insurance on the property.
Maintain the property adequately.
If the terms are not met by the borrower after agreeing to them and signing this documentation, the lender can then demand full repayment of the loan.
It is advisable to have a real estate attorney help you to draft these documents. This best ensures that both the lender and the borrower are protected from any unscrupulous behaviors on the other person’s part. It also helps to keep things impartial when so much money is exchanging hands between family members.