5 Tips for Getting a Private Loan from a Friend or Family Member

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When purchasing a home, you might find yourself a bit short on the cash that you need to pay for the home. Whether you need a loan to pay for the entire cost of the home or a loan to help pay for the down payment and closing costs, you might want to turn to a friend or family member for help. If you find yourself needing to ask for a loan from someone you know, here are a few tips to help make the process go as smoothly as possible.

Tip #1: Treat the Friend or Family Member the Same as You Would a Bank

When going to a bank for a loan, you would certainly come prepared with the proper paperwork. You would also come to the lender with realistic expectations of what you can borrow and how much you can afford to repay each month. When approaching a friend or family member for a loan, you should come with the same expectations. Just because you are borrowing money from someone you know, it does not mean that you should expect special privileges or treatment.

Tip #2: Agree Upon an Interest Rate that Benefits You Both

One benefit to getting a private loan is the fact that you can get a better interest rate than you might get from a traditional lender. On the other hand, lending money to you should be viewed as an investment on the part of your friend or family members. This means you should not expect to get a loan with an interest rate that is so low that your family member loses money over time. By taking a close look at the market, you can determine an interest rate that helps keep your costs down while also helping your family member earn a little money along the way.

Tip #3: Be Prepared to Sign a Promissory Note

Just as with a loan from a traditional lender, a private loan requires a promissory note. Also referred to as a mortgage note, the promissory note states the terms that you and your friend or family member have agreed upon. The promissory note should include the amount of the loan, the interest rate, the repayment dates and how may payments are required to pay off the loan.

Tip #4: Create a Deed of Trust

To help secure the loan, you will need to create a mortgage, or deed of trust. A deed of trust gives your friend or family member the right to foreclose upon your property if you fail to make payments as agreed upon in the promissory note. In this way, your friend or family member holds a lien on the property until you have paid it off, just as is the case with a traditional loan. This document also provides you with certain protections, as your friend or family member will not be able to foreclose on the property simply because of a disagreement or other issue that is not related to your financial agreement.

Tip #5: Keep Your Friend or Family Member Aware of Financial Issues

Sometimes, unforeseen circumstances make it difficult or even impossible to repay your loan as you agreed to repay it. If this occurs, treat your friend or family member in the same way you would treat a traditional lender. In other words, discuss the situation with the person who loaned you the money and discuss alternative payment options. For example, you may make a loan modification that involves lowering the payments and increasing the number of payments that are made over time. Or, you might agree to temporarily freeze payments unitl you are back on your feet.

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