Many homebuyers, especially first-timers, turn to family and friends for financial help with the down payment or mortgage. The benefits are numerous, including interest savings, flexible repayment plans, easier qualifying, minimal red tape, and saving on private mortgage insurance (typically lenders require PMI for loans where the down payment is less than 20%). If you need convincing as to the benefits of private loans to borrowers (as well as lenders), see the Nolo article Borrowing From Family and Friends to Buy a House.
Does an Intra-family Loan Make Sense?
Whether or not a home loan from your parents, other relatives, or friends is feasible depends on several factors, including:
• how much money you need (a $5,000 loan to help with the down payment will probably be easier to get than $100,000),
• how well-off your potential lender is and whether they have liquid assets to easily make the loan,
• how long you need to borrow the money for (if your parents need the loan repaid in five years when they’re ready to retire, a short repayment period may not work for you), and
• your personal relationship with your family member or friend—a rocky relationship with your parents or a history of failing to repay money you borrowed, won’t help your cause.
How to Approach Your Parents or Other Private Lenders for a Home Loan
Do your homework before you approach your family or others for help financing your new house.
Prepare a Proposal of Loan Terms
Start by making a list of key terms and issues, including:
• details on the house you want to buy and how much you expect to pay
• the amount of money you want to borrow (and how you plan to finance the rest of the down payment and/ or home purchase)
• the interest rate (if any) you propose to pay—probably less than current market rates (which you can get by checking websites like compareinterestrates.com or bankrate.com)
• your proposed repayment plan (monthly, quarterly, or something else)
• your financial ability to meet the proposed repayment schedule
• the financial protections you’ll offer the lender (such as a promissory note and/or mortgage), and
• penalties for late payments and fees.
If you’re offering to pay an especially competitive interest rate, spell out the financial benefits to the lender (how your proposed interest rate compares to money-market and CD rates).
Make photocopies of all relevant documents, such as the financial materials you pulled together for your bank or other lender and a recent credit report.
When and How to Make Your Pitch
You’ll want to approach this as a business proposition, where you’re asking your folks or other lender for a loan at a fair rate of interest, secured by a promissory note and/or a mortgage.
To present it this way, of course, you’ll need to find the appropriate time and place. Never surprise a Mom and Dad or other potential lender by blurting out your request on the way back from shopping or at some other informal occasion. Make an appointment, even if you see your parents (or brother or old roommate) regularly and the formality seems odd. Give them a general idea of what you want to talk about, but save the details for your meeting.
Creating Home Loan Documents When You’re Borrowing Money From Family or Friends
If your relative or friend agrees to lend you money, you’ll need to finalize the loan with the proper legal paperwork. To make your agreement legally binding, you should sign a promissory note for the amount of the loan, including the rate of interest, repayment schedule, and other terms, such as penalties for late payments. You can find several promissory notes for sale on Nolo’s website.
If you’re borrowing only a few thousand dollars, a promissory note may be all you need. But for larger intrafamily loans, it makes legal and financial sense to also prepare a mortgage (a “deed of trust,” in some states). A mortgage gives your lender an interest in your property to secure repayment of your debt (per the promissory note, and it needs to be recorded with a public authority, such as the registry of deeds. Unless you’re experienced in real estate transactions, we recommend you get an expert’s help with preparing and recording a mortgage and related legal documents. Ask your lender or closing agent for advice, or check out the real estate attorneys in Nolo’s Lawyer Directory.
More Information on Borrowing Money for Your Home Purchase
For more on home financing and loan alternatives, see the book Nolo's Essential Guide to Buying Your First Home, by Ilona Bray, Alayna Schroeder, and Marcia Stewart.