Dear Heather, I see that there are some wonderful opportunities for first-time buyers at the moment. However, I haven’t had much luck at the banks because I haven’t got the full 25 per cent down payment plus closing costs. I’ve worked out that my mortgage payments would actually be less than I’m paying in rent, which is frustrating. Do you have any ideas? Help!

— First time buyer.

Dear first time buyer, Although ideally a mortgage arrangement through a bank or other lending institution is the way to go, if you find yourself unable to go this route, private financing through individuals or family members that may be willing to lend you money to purchase a house, might be an alternative option for you. This is because bank interest rates on savings accounts are extremely low at the moment, whereas interest rates for borrowing, as you are aware, are higher, thus benefiting the lender. Although loans from family, friends or individuals or even in some instances, the home seller, can be good for you as a borrower, asking for money can be tricky, considering the large sum involved. Don’t enter into a private home loan lightly — it’s a legal contract, and you don’t want friction with Aunt Matilda at the holidays. However, if you plan ahead, structure the loan carefully, and explain how the loan can work to the lender’s advantage, everyone can be more comfortable about the arrangement.

How to ask family or friends for a loan

When you approach your friend, family member or individual for a home loan, have a plan. It is recommended to treat a private home loan as you would a mortgage from a bank. Borrowers should be realistic about what a practical repayment plan would be and not try to borrow more than they can repay.

If this approach seems businesslike, that’s because it is. When you create a legally binding loan contract, even your mother can take you to court for missed payments — and she can win.

Private home loans are similar to

traditional mortgages

Private home loans, also called private mortgages or interfamily mortgages, aren’t that different from a loan from a bank. As with institutional loans, and private home loans:

* Both lender and borrower sign a legal agreement or promissory note (also known as a mortgage note) stating the terms of the agreement

* The agreement should establish the amount loaned and the interest rate, as well as the repayment dates and frequency

*?The borrower and lender draw up a mortgage (also called a deed of trust) giving the lender the right to foreclose on the property if the borrower fails to stick to the repayment plan

* The lender holds a lien on the mortgaged property

If you are borrowing from family or privately for a down payment, you must disclose to the bank or lending institution from where you get your mortgage so that they can be sure you are not overextending yourself as far as repayments are concerned.

The arrangement legally protects both the lender and you, the borrower. The lender may not foreclose on your house due to a family disagreement and can’t request repayment in full because of other financial needs. So, if Aunt Matilda wants to go on a cruise, she can’t demand that you foot the bill, as long as you’ve been sticking to the agreed-upon repayment schedule.

Private home loans benefit borrowers

When you borrow from a friend or family member, you benefit in several ways:

* Better interest rates. You can negotiate with your lender to determine the interest rate that works best for you. Even if that rate is lower than what you’d pay for a loan from the bank, it can work out to the lender’s advantage.

* Setting your own repayment terms. You can determine a repayment schedule that works best for you — monthly, twice monthly or any other. Don’t take advantage of your lender’s generosity, though; you are still legally obligated to make payments as stated in your agreement note.

Private home loans benefit lenders

Lenders also receive benefits in a private home loan:

* Better interest rates. Even if your interest rate is lower than that of a bank loan, the rate could be higher than what the lender earns through a savings account or investments.

* Regular income. With the structure provided by your promissory note’s repayment plan, the lender will know exactly when to expect your payments and how much they will be.

Missing payments

with a family loan

Unforeseen life twists happen. You might lose your job or have medical bills that pile up. With a family member or friend, as with any lender, discuss the situation. Dodging Aunt Matilda’s calls aren’t the way to go. The options are the same. Loan modification can include lowering payments in exchange for a longer loan term, temporarily freezing payments, balloon payments or maybe making some interest only payments.

•Heather Chilvers is among Coldwell Banker Bermuda Realty’s leading sales representatives. She has been working in real estate for 25 years. If you have a question for Heather, please contact her at hchilvers@brcl.bm or 332 1793. All questions will be treated confidentially.