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How To Set Up a Home Loan From your Parents

Buying a home is expensive and oftentimes first-time home buyers are unable to qualify for financing from a bank. If you are able to obtain the money from your parents, you are able to save on interest, make the terms more flexible than a bank would, and obviously have an easier time getting the money than you would from a bank. However, this does not mean that you should approach the situation lightly. There are certain requirements you should follow closely to ensure that the process goes smoothly and does not damage your relationship with your parents.

Start with a Proposal

Before you assume that you will be able to obtain the loan from your parents, create a written proposal. Just like you would do with a bank, let your parents know all of the details of the house and the loan you are proposing. Write down the price of the home, the estimated value, how much you intend to put down from your own money, how often you plan on making payments and how you plan to afford the payments. This is the best way to show your parents that you are serious about the money you want to borrow and that you will repay the loan rather than defaulting and causing financial and emotional stress with your family.

Create a Promissory Note

A promissory note is the document that shows how much you are borrowing, the interest you will pay, how often you will make payments and when the loan will be paid in full. This is a legally binding document and should be notarized to show its effectiveness should anything go wrong down the road. The document should have your name and your parents’ names on it, the date of the document, and be signed by all parties. This document can be written up on your own, as it is fairly straightforward. Before you start, give careful thought to how often you will make payments. Will they be weekly, bi-weekly, monthly, or another time that you and your parents deem acceptable? If you plan on paying interest, do your research to determine the fair market value of interest rates at the time you borrow the money. There are no laws governing the maximum rate that can be charged, but you should keep it fair.

Create a Deed of Trust

The mortgage deed should be created with the help of a professional as it is an essential part of the process. This document gives your parents legal rights to the property should you stop making payments on the property. In order for the deed to hold its weight, it needs to be recorded with the public authorities in your area or county. Basically the piece of paper lets your parents know that if you stop making payments they will be able to proceed with a foreclosure, sell your home, and use the proceeds to make up for the money that you are not paying back.

Create a Schedule for Repayment

Just like your loan documents from a bank would include a repayment schedule, the same is true for your loan with your parents. It helps to keep everyone on the same page and to avoid arguments down the road. Make the repayment schedule as detailed as possible, especially if you will be paying different amounts at different times of the year. If it is a fixed rate loan that you will pay off over a series of 10 years or so, the document can be pretty basic, especially if you are paying monthly. If your payments will be more sporadic or differing amounts, then you should make sure that the details are noted in this document and signed by everyone so there are no issues down the road.

Obtaining a mortgage from your parents is a great way to get the money you need to purchase a home, but remember that family is fragile and if you value your relationship you will want to do everything possible to protect it. Having the right documentation completed and notarized simply protects everyone in the process of creating the mortgage, enabling you to have the home you want while keeping your family intact.