How to make intra-family mortgage loans work

An image of an adult mother and daughter looking at numbers on a spreadsheet.

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Take a mortgage loan from a bank—Or any financial institution — is not cheap. The idea of ​​dealing with interest and compound rates can be daunting. This makes borrowing from family and friends much more attractive and affordable.

When it comes to the expensive purchase of a home, loved ones may be enthusiastic about supporting and able to help with a cash loan much faster than a bank would ever approve. But while there are many ways that a personal loan between loved ones could be a win-win, there are also times when it ends badly. A well-meaning parent may feel abused, or a grandchild may mistakenly assume that a loan was in fact a gift.

To avoid any setback, there are four rules that every party, borrower and lender, should keep in mind. Going forward, real estate professionals share their firsthand experience with family loans and how they made them work with loved ones.

4 tips for successfully accepting a mortgage from a loved one

Write down your intention.

The fact that you are applying for a loan from a family member should not make you forget about the formal loan process. Explain what you plan to do with the money: are you buying a personal home, investing in an income-generating rental property, or launching your own solution? The person lending must have confidence in your repayment plan, and part of that comes from their ability to assess the property, its value, and your ability to generate enough money to own the property and pay off the loan at the same time.

Indicate the loan amount and its term in your payment plan.

State the exact amount you expect to receive from your relative, as well as when they can expect it to be paid back. How do you plan to make the payments? Lump sum or staggered? If you pay monthly, from which month will the repayment start? Nail those details; both parties must agree — in writing.

Define the interest rate.

Although most parents do not want to receive interest, some do. Current mortgage interest rates hover around 3%. A family friend might ask for as little as 1%, just for the both of you to achieve something in the market. Beyond the interest rate, set whether it is compounded daily, weekly, monthly, or not at all.

Be clear about what happens if you don’t pay back.

You know the consequences of defaulting on a mortgage loan with a bank. You had better believe that there should be consequences if you don’t reimburse your own parent, child or other family member.

Create predictability by setting fees for late payments and define what can be resumed if the loan is not fully paid on time. In some cases, the lender may want to repossess the deed. In others, the lender may prefer to extend the term at a higher interest rate or a large sum. The possibilities are endless, which is why you and your loaner family member should negotiate these terms.

A win-win situation in real life: there are countless advantages to taking out a private loan.

Olivia de Oliveira is a real estate investor in Memphis, Tennessee, and owner of Restoration Properties, LLC. To buy her personal residence, she took out a 30-year private loan (with compound interest) from her mother. They used a real estate attorney to prepare a promissory note and a trust deed.

“My mother had money to invest, so I asked her to give me a private loan to buy my house,” says Oliveira. Parents. “I pay him a good interest rate and the promissory note sets out the terms like any other mortgage,” she explains. There is a 4% late fee if payment is not received by the 15th of each month, and her mother can foreclose on the house if de Oliveira defaults on the loan.

Although the rate is not cheaper than the bank rate, this arrangement is very beneficial for de Oliveira because, as an investor, this loan does not appear on his credit report; Plus, she saved on origination costs and didn’t have to save money. This frees up her capital for other investments and she can still write off the mortgage interest on her taxes.

Oliveira says things worked out so well with her mom that if her mom was interested in loaning her money again for another real estate project, she would agree.

4 tips for successfully financing a mortgage loan to a loved one

If you are loaning money to a family member, you should be aware that there are risks. Of course, you want to protect your money, but you also want to protect your reputation and the harmonious relationship you have with other members of your family.

For example, your daughter might be jealous to learn that you loaned your son a large chunk of change when she also had a competing need for money. Thus, it is just as important to examine the sensitivities of the relationship as it is to be aware of the funds available.

There are four simple things to keep in mind if you are considering giving a loan to a family member for the purchase of a home.

Only lend what you are prepared to lose.

Of course, you have to go the hard way and make sure the borrower knows that you are expecting your money and on time. But, if things go wrong in your family due to their inability to pay, you need to be clear as to whether you will go to court and legal disputes to get your money back or whether you are ready for the past to be. the past. Don’t throw your savings into buying a home for a child, parent, or loved one if you really can’t afford to watch that money disappear into thin air.

Learn about other competing loans.

When banks agree to offer a mortgage, they ask to know the number of other loans the borrower has, the amount of income he receives and his credit report. It’s not just about being curious; it’s to see if this person is going really be able to carry this loan until full repayment.

Although your loved one may be offended if you ask for all of this information, know that it is your right to know. If they take a loan from you for a down payment on a house and still have to pay a monthly payment to a mortgage company, be realistic about whether they are really making enough to pay you both. . The same is true if they have a lot of credit card debt or a history of tax irresponsibility. If the loan is large, make some sort of underwriting before you take their word for it.

Plan for the worst-case scenario.

God forbid you get sick, incapacitated or worse. What do you want to happen with the loan? Is it due in full? Would it pass to your heirs or your estate? Do you intend for him to be forgiven? Think of the worst case scenario and write it down. Share it with the loved ones who would be concerned, so that they can carry out your wishes, if you are not able to do it yourself.

Emotionally prepare to watch and wait.

Chances are, if you lend money to a loved one for a house, you really like them. You want the best for them. But giving them a loan doesn’t give you the right to be intrusive, especially if they pay you back on the agreed terms.

Remember: your loan does not mean that you have the right to access their home (the mortgage lender does not have the keys to your front door). Plus, it can be difficult to watch your loved one make decisions that you don’t agree with, especially if they can affect the terms of your loan. But, as long as they make the necessary payments to you, you need to be emotionally ready to crash.

A real-life win-win situation: get creative with the loan structure.

Robert taylor used his repair and turnaround business, the Real Estate Solutions Guy, to strike a deal with his son in his 20s.

“We found a house for sale that was not fundable due to its condition,” Taylor said Parents. “I asked him if he was interested in the house, if we could make the finances work for him. My business would buy the house for money and then rehabilitate it. Then we would give the house to my The difference was we would sell it to him at a price he could afford, ”Taylor says.

They got an appraisal of the new value of the renovated house, and her son got a bank loan for the amount he could afford. This allowed them to establish a participation agreement to make up the difference between the affordable price the son paid ($ 180,000) and the full appraised value of the house ($ 250,000). When asked how it worked, Taylor said his son “would own 72% (180,000/250,000) of the value of the house. Our company would own the remaining 28% of the value. Any appreciation would be split between we.”

Other than that, however, “the purchase would be like any other home purchase,” Taylor reiterates. “Although we did own some of the equity, we did not own the house; the property belonged entirely to my son. He could keep the house as long as he wanted or sell it when he wanted. “

They recorded the sale to Taylor’s son, and there was a trust deed. When his son decided to sell the house a few years later, the proceeds were divided according to the equity agreement — and they both made a good profit.

The bottom line.

Not only is it possible to conclude a successful intra-family mortgage, but there can also be untold benefits for both parties. Having said that, it is important to remember that this is a business transaction. Even if this is your own child or parent, and you have known that person your entire life, both parties need to do their due diligence to make smart money decisions with their heads, not acts of faith with their hearts.

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