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 Borrowing From Family and Friends to Buy a House.
Whether or not a home loan from your parents, other relatives, or friends is feasible depends on several factors, including:
Do your homework before you approach your family or others for help financing your new house. You want to be clear and business-like about what you're requesting.
Start by making a list of key terms and issues, including:
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 current money-market and CD rates).
Make photocopies of all relevant documents, such as the financial materials you pulled together when applying to a bank or other lender and a recent credit report.
To present your case for a loan in compelling terms, you’ll need to find the appropriate time and place. Never surprise Mom and Dad or another 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 the person regularly and the formality seems odd. Give the person a general idea of what you want to talk about, but save the details for your meeting.
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.
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.