Nolo's Essential Guide to Buying Your First Home (33 page)

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Competitive investment return.
You can offer to pay an interest rate that’s higher than your lender could get on a comparable low-risk investment like a money-market account or certificate of deposit (CD). (And you’re still likely to pay less than you would to a bank.)

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Ongoing source of income.
Some investments just sit there and gain in value or pay occasional dividends. With your private loan, your lender will receive regular payments from you, which can be reinvested.

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A financially liquid asset.
Some investments, such as long-term CDs, are hard to cash out in an emergency. Don’t worry; we’re not saying your family lender can change his or her mind. But he or she can potentially sell your mortgage to someone else. (There is a secondary market for the purchase and sale of existing mortgages, or you may be able to refinance if your lender wants out.)

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Low risk.
Your parents or other private lender can count on two things: first, your commitment to repay the loan, somehow, someday, even if the original repayment schedule needs to be rejiggered; and second, that your house offers collateral. If worse comes to worst, you can sell it and repay the loan. (Or your lender can foreclose on you, though few would ever do that.)

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Emotional satisfaction.
Don’t underestimate the sense of achievement that your loved ones get by watching you gain a foothold in the world, with their help.

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How much money do you need?
If it’s $5,000 or $10,000 to help with the down payment, that will probably be a lot easier to come by than $50,000 or $100,000.

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How long do you need to borrow the money for?
Some private lenders may be fine with a ten- or 20-year repayment period (and for tax reasons, may actually prefer a longer term). But if your relative or friend wants the money completely repaid in a few years, make sure such an arrangement is financially feasible for you.

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Do you have any other options?
Is your credit so bad that no bank will approve the loan (or you’ll only qualify at really unfavorable terms)?

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Does a close relative or friend have the money to lend for the amount and term you need?
If your parents are well-off but are going to need money soon for retirement or to pay your brother’s college tuition, they may not be in a position to help.

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What are the personal costs to you?
If you risk hurt or jealous feelings of siblings, cousins, or others; a sense of perpetual debt or guilt; or similar hazards, the loan may not be worth it.

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What are the costs to set up a private loan?
Getting specialized help from an attorney and accountant to structure your private mortgage may run in the thousands. Consider companies like Virgin Money that can set up and manage the loan for much less or just go back to your conventional lender, especially if the private loan would be fairly small (say, less than $10,000).

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Does your family member or friend trust you?
Your lender wants assurance that you’ll eventually pay the money back, so not only love, but trust, will be key. If you have a history of credit problems and debts, you’ll need to show concrete evidence—to your lender and yourself—that you’ve learned how to responsibly handle debt.

• the amount you want to borrow, at what interest rate and repayment schedule (see below for advice)

• the amount of money you have available for the down payment (the higher it is, the lower the lender’s risk of loss)

• your financial ability to make monthly payments (even without setting rigid qualification rules, your lender will want to know)

• the financial protections you’ll offer the lender (a promissory note and mortgage, as described below), and

• the financial benefits to the lender (how your proposed interest rate compares to money-market and CD rates).