For many people a conventional mortgage is just not going to happen. The heavily regulated and bureaucratic banking system will not consider them for a conventional mortgage because they have a less than perfect credit record, they are self employed or earn commission and cannot prove a regular income stream, or they wish to buy unconventional property that the bank simply will not fund.
Many who find themselves in this position will approach family members for a loan. This can be a win-win situation where the lender earns extra interest and the borrower pays less than he would to private lending organisations. However, those contemplating an arrangement such as this must consider the impact that borrowing can have on relationships, especially if the situation arises where the borrower is unable to fulfil his obligations.
Always take into consideration the personal circumstances of the lender in relation to risk. Would failure to repay the loan result in personally damaging consequences. Is the money earmarked for retirement or for a child’s education?
If the lender agrees to the loan she should ensure that the property is secured by a lien, failure to do this can result in the borrower taking a mortgage which would receive first payment in the case of foreclosure. Before concluding the agreement, a tax consultant can help you with advice so that you stay on the right side of the tax authorities.
There should be a written agreement that covers all aspects of the loan. This should include payment terms, loan period, initial value, and the penalties for failure to make on time payments. The loan should be covered by collateral and this should also be carefully documented.
Remember that circumstances change and that borrowing and lending within any relationship can stretch the friendship to breaking point. If you are not willing to put the relationship at risk, there are other options.
Private First Mortgage Lenders
The private lending industry aims to fund those who find it difficult to get a conventional loan. Private first mortgage lenders use the property you purchase as collateral on the loan. This is why they can be more flexible when it comes to your personal circumstances.
Private loans are short term in nature. They are typically one to three years in duration. Borrowers taking these short-term loans should use the loan period to Improve their credit rating or increase their home equity. This way they can approach the banks for a conventional mortgage at the end of the term. If you have decided to go this route you should budget for the additional costs below.
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The Costs of Private Borrowing
- The costs to appraise the secured property. You will be expected to pay the appraisal costs when the appraisal happens so you should not arrange an appraisal before you find a lender.
- Legal fees for both you and the lender will be for your account.
- Interest rates in the private lending environment tend to be considerably higher than those charged by the banks. The interest rate that you are charged will be determined on your own unique set of circumstances. The higher your down payment and the better your credit rating the lower the interest.
Consider Your Options
Everybody needs a break sometime and most of us strive to purchase our own homes rather than renting from others. If the banks are turning you down, examine your options. Private lending is a vibrant and growing industry, and those in the industry are approachable, striving to ensure that borrowers receive the customer service that they deserve.
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