Private Mortgages

The world is full of lenders, including big banks, local credit Unions and online lenders So why not just fill out an application and borrow from one of them?

For starters, some borrowers might not be able to qualify for a loan from a traditional lender. Banks require a lot of documentation, and sometimes a borrower’s finances won’t appear to be sound enough for the bank’s preference. Even if you’re more than able to repay the loan, mainstream lenders are required to verify that you can repay, and they have specific criteria to complete that verification. For example self employed people don’t always have the W-2 forms and steady work history that lenders require, and young adults might not hav e good credit scores because their credit history is short.

A loan between family members can also make good financial sense.

Similarly, people with extra cash on hand can earn more by lending privately than they’d get from bank deposits such as CDs and savings account.

Life is full of surprises, and any loan can go bad. You may agree to a personal mortgage with good intentions, but there are risks you should consider beforehand.

Introducing debt into a relationship can be tricky. If money gets tight for the borrower, he may feel extra stress and guilt if he’s unable to make payments. The lender, on the other hand, is put into the predicament of either sternly enforcing a payment schedule or taking a loss.

Just as the borrower’s financial situation may change, so can the lender’s. Evaluate the lender’s ability to take on the risk of a large loan before moving forward. This is especially important if others are dependent on the lender, such as children or spouses. Consider whether making the loan may affect the lender’s ability to retire, care for dependents, or make other important financial moves.

Real estate is expensive, and the value of a property can vary greatly over time. Lenders need to be comfortable with the condition and location of the property and confident that the home’s value will not decrease.

It takes time, money, and attention to maintain a property. Even with a satisfactory home inspection, issues can come up. Lenders need to be sure that the resident or owner will be able to pay for maintenance and address any problems before they get out of hand.

The lender should insist on securing the loan with a lien If the borrower adds any additional mortgages, or somebody puts a lien on the house, this ensures the lender gets paid first. However, you’ll also want to check for any issues before the sale. Traditional mortgage lenders insist on a title search, and the borrower or lender should ensure that the property has a clear title. Consider title insurance, which provides extra protection.

Tax laws are tricky, and moving large sums of money around can create problems. Before you do anything, speak with a local tax adviser so that you’re not caught by surprise.

Any loan should be well-documented. A good loan agreement puts everything in writing so that everyone’s expectations are clear and there are fewer possible surprises. Years down the road, you or the other party may forget what you discussed, but a written document will spell out the details.

• When are payments due (monthly, quarterly, on the first of the month) and is there a grace period?
• How and where should payments be made? Are electronic payments preferred?
• Can the borrower prepay, and is there any penalty for doing so?
• Is the loan secured with any collateral?
• What can the lender do if the borrower misses payments? Can the lender charge fees, report to credit reporting agencies, or foreclosure on the home?

Also, it’s wise for the lender to secure their interest—even if the lender and borrower are close friends or family members. A secured loan allows the lender to take back the property through foreclosure and get their money back in a worst-case scenario.

If the property is held in the borrower’s name only—without a properly filed lien—creditors can go after the home or pressure the borrower to use the homes value to satisfy a debt.

For documentation, work with qualified experts. Talk to local attorneys, your tax preparer, and others who can help guide you through the process. You’re working with large sums of money; this isn’t a DIY project. When hiring a professional, you may want to consider:

• Will you get written mortgage agreements?
• Can payments be handled by somebody else (and automated)?
• Will documents be filed with local governments (to secure the loan, for example)?
• Will payments be reported to credit bureaus (which helps borrowers build credit )?

Professional help at the outset will ensure that your private mortgage arrangement continues to benefit both parties for the life of the loan.