A friend lending money for a home mortgage may not be a good idea for everyone. If you are considering lending money to a friend to help him or her buy a home, keep a few things in mind before you make that decision.
A Friend Lending Money for a Home Mortgage Can Open Doors
There is no doubt that business situations like these often do not mix well with friendship or family. In some cases, this experience can lead to strains on friendships, especially when one party fails to hold up his or her end of the agreement. Nevertheless, there are circumstances when you may wish to extend this type of offer to a friend.
You may wish to help your son or daughter to purchase their first home. On the other hand, you may be the go-to person for a family member who is unable to maintain his or her financial situation due to poor financial decisions. In this last case, it may be best to say no.
If situations where you hope to buy a home for a loved one and allow them to pay you back over time, it is a good idea to consider the situation carefully before getting involved.
- Do you have the funds available to pay for the property outright? If not, will you take on the financial responsibility of a home mortgage for that family member?
- Can you withstand not receiving repayment for the borrowed funds? If there are circumstances that arise and the family member cannot pay you, will this harm your financial standing?
- Will you form a legally binding contract to ensure repayment according to specific terms? This can protect you financially in the long term.
- Will you charge interest for the borrowed funds? There may be tax problems if you don't charge interest.
- Who will be owner of the property until the balance is paid in full? This person will need to hold legal ownership, which will include having insurance on the property and being responsible for the location in total.
Ask yourself these questions to get a good understanding of what will happen if you lend this money to someone. No matter who they are, you do have to consider your family's well-being financially.
Form a Contract
One of the best routes to take is to form a legally binding contract before you lend money to friends and family for a home mortgage. You can do this through an attorney. Another option is to use a third party organization that will monitor the transaction for you. The organization will help you to set up a legally binding contract for a fee and then each month it will ensure that funds are collected from the payee and are paid to you on time. This type of third party arrangement allows someone else to manage the debt.
Alerting Lenders
A friend lending money for a home mortgage down payment is another way many people help out their loved ones. However, it is important that this type of loan is documented and made known to the mortgage lender. In situations where the funds are gifted, meaning they are not repaid, it is critical that the lender approve that scenario. In most situations, mortgage lenders will only accept gifted down payments from close family members rather than distant family members or friends. They may believe that distant family and friends are more likely to consider the funds secured loans.
In situations where the funds will be loaned to the home buyer, this too needs to be properly documented with the lender. In this situation, the lender will want to ensure that the borrowed funds are factored into the value of the home before agreeing to the situation.
Ask lenders about any stipulations on borrowing funds to repay home loans or for down payments. This simple borrowing may lead to complications from lenders in some situations.
