An image of an adult mother and daughter looking at numbers on a spreadsheet.
Taking a loan from a bank—or any financial institution—doesn’t come cheap. The idea of dealing with compound interest and rates can be intimidating. This makes borrowing money from family and friends much more appealing and affordable.
When it comes to the big-ticket purchase of a home, close relatives can also be enthusiastic to support 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 relatives could be win-win, there are also times when it ends poorly. A well-meaning parent can feel taken advantage of, or a grandchild might wrongly assume a loan was really a gift.
To avoid any hiccups, there are four rules that each side—borrower and lender—must keep in mind. Ahead, real estate pros share their firsthand experience with intrafamily loans and how they made them work with their relatives.
4 Tips for Successfully Accepting a Mortgage Loan from a Relative
Write down your intention.
The fact that you are asking for a loan from a family member shouldn’t make you overlook any formal loan processes. Explain what you plan to do with the money – buy a personal home, invest in an income generating rental property, start your own fix or flip. The person who is lending must trust your repayment plan and part of that comes from their being able to assess the property, its value, and your ability to generate enough money to own the property and repay the loan at the same time.
State the amount of the loan and its duration in your payment plan.
State the exact amount you are hoping to get from your relative, as well as when they should expect their money back. How do you plan to make payments? Lump sum or by installments? If you will pay monthly, in which month will repayment start? Nail down these details and both parties must agree—in writing.
Define the interest rate.
Although most relatives would not want to receive interest, some do. Current mortgage interest rates are hovering around 3%. A family friend might only ask for 1%, just so that you both make something off the deal. Beyond the interest rate, define if it is compounded daily, weekly, monthly, or not at all.
Be clear about what happens if you don’t repay.
You know the consequences for defaulting on a mortgage loan …….