Typically, mortgages are offered by banks and financial institutions. But there are private individuals or investors also who provide mortgages. Sometimes, your family members may also offer you private mortgages.

If you are having a tough time getting a mortgage from banks, you can consider approaching a private mortgage lender. It is also a good option when you have a poor credit score and are being turned away by financial institutions. Getting such a mortgage can help you improve your credit report.

There are certain things you must keep in mind when taking out a private mortgage from a lender or family member:

Compare Interest Rates Offered by Different Private Mortgage Lenders

As a private mortgage is generally the last resort of a borrower with bad credit, the lender may charge unreasonably high interest rates. The rate may be based on his analysis of the real estate market in your city and not just prevailing bank rates. Charging about 3% to 4% above the bank rate is natural as he will require some sort of a hedge against the high risk he is taking, but make sure that the rates quoted are not unfairly high. Also, the term of the mortgage will generally be short- another factor you should keep in mind before approaching the lender.

Ensure that the Documentation is in Place and you Understand all Legal Issues

Ensure that the loan agreement is well documented. Include your expectations and that of the lender in the document. Make sure that the document clearly mentions the amount due, repayment plan, installments, rates, prepayment penalties, defaults and so on. Also check if the agreement is in line with the legal and statutory requirements. Take the help of your lawyer and chartered accountants to ensure compliance. If you are busy, then you can have your lawyer act as your representative.

What to Remember when Borrowing from Family?

Private mortgages are also offered by family members, who become lenders for many reasons. The reasons vary from helping fellow family member(s) to keeping the money within the family. Irrespective of the reason, you should ensure that you have a proper loan agreement with family member who is lending you the money. The agreement should include the conditions of the loan, repayment schedule and collateral. Documenting the agreement brings clarity and serves as a point of reference for the family members.

When you borrow from family there could be serious tax implications if the necessary procedures are not followed. Make sure that you work with qualified lawyers and taxmen to make the borrowing official. Even though you are borrowing from your family, ensure that you provide collateral to protect the interest of the lender from any adversities affecting your repayment capability.

Make sure that the family member is giving you the loan from surplus funds. If he has to use his emergency funds or access retirement funds to lend you the money it is advisable to look for other private mortgages, as this can seriously jeopardize the financial stability of the member.

Author Bio: For more information on second mortgages or home equity line of credit, contact Canadian Mortgages Inc.

Category: Finances
Keywords: second mortgage