Getting a Family Loan to Buy a House: How Do I Show Preapproval?

Tips for convincing a home seller that your family lender will come through with the funds.

Question

My wife and I are planning to buy our first home. While I have a job, the pay isn’t great, and I could never get approved for a bank loan in an amount sufficient to afford a home to fit our growing family. (Twins are on the way!) My wife won’t be working after the babies arrive, either. Fortunately, my parents have been disappointed by how their other investments are performing, and are happy to lend us the full amount needed to buy a home, at a modest interest rate.

Here’s the problem: We live in a competitive real estate market, where we are facing bidding wars with other eager buyers. While I think we’re in a strong position, given that we can waive the financing contingency, it seems like home sellers all want a mortgage preapproval letter from a bank—and we don’t have one. Is this going to be a problem? What can we do about it?

Answer

You are right that a home purchase offer that comes without a financing contingency should be attractive to home sellers. Even those other buyers who come with preapproval letters from banks must still jump through a lot of hoops in order to get final lender approval, and the deal can fall apart from the last minute.

If you waive the financing contingency, then you are in effect saying that you have no doubt that your parents will come through with the money—or that if they don’t, your pulling out of the deal would be a breach of contract, and you’d forego whatever amount you put down as your earnest money deposit.

It’s true, however, that home sellers will want something that serves as the equivalent to a mortgage preapproval letter. Their bottom-line concern is, “Can this buyer really come up with the money to close the deal?” They want the deal to go through, not to keep earnest money and practically start over again.

Fortunately, you’re not the first to face this dilemma. Others have successfully bought homes using family financing, typically by some combination of the following:

  1. Providing a letter from Mom and Dad (or whoever their lender is) or from their financial planner or adviser confirming that they really do intend (and are in a position) to provide financing for the home purchase.

  2. Providing copies of recent bank statements verifying that the lender possesses the funds, and that the money is in liquid form (in other words, easily available and converted to cash).

  3. Offering to have the family lender deposit the funds in a neutral escrow account managed by an appropriate third party. This could be, for example, at your real estate agent’s office, with a title or escrow company, or with an attorney.

There’s no need to feel like you’re in a weaker position than other buyers. With a loan from parents, you are almost offering an all-cash offer, which should delight any home seller—it’s just that you’re one (very short) step away from the cash.

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