More commonly known as a private home loan, a private mortgage is somewhat identical to a bank loan or a loan obtained from a credit union, or some other institutional lender. Basically, your private lender holds a lien on your property and can legally claim complete payment on the outstanding balance in case, you don’t make payments on time. Moreover, if you default on the loan, your private lender even holds the right to foreclose.
When the private lender agrees to loan you the funds that could either finance all or part of your home purchase, you are supposed to handle the transaction in a proper manner. This brings us to the idea of drafting and signing a written promissory note and accompanying mortgage documents. Though not necessary, drafting a written repayment schedule is a wise move too. Now, if you don’t understand what a promissory note is, here’s the explanation. In general, a promissory note is a legally binding document having your initials. The note is meant to prove that you’ve given your word to make the loan repayments under agreed-upon terms such as the interest rate, payment dates and payment’s frequency. The note further points out the possible penalties incurred if payments aren’t made in a timely manner.
Another term that you should know about is mortgage or “deed of trust” which is a legal document that offers security for the promissory note. According to the “deed of trust”, your private lender has the right to foreclose on your property if the loan isn’t paid back or you are unable to pay back the total fees and interest. It also mentions the presently recognized owner and legal property details, explaining the borrower’s liability to pay principal, interest, taxes, and insurance on time. It further illustrates the borrower’s responsibility for maintaining hazard insurance on the property. Failure to fulfill these obligations could result in an immediate demand of full loan balance payment by your private lender.
Remember, a private lender can be anyone from your relatives or friends, willing to lend the required funds to buy a property. But, the main question is,” Does this help the lender in any way? The answer is, YES. Your friends and relatives can greatly benefit from the deal. Firstly, they’re getting an improved rate of return. Secondly, they are likely to be offered a comparatively higher interest than they could make from other investments. Thirdly, by lending you the money, they’re actually developing a stable income stream. Since private mortgages are normally repaid over time rather than being paid in one lump sum, following an agreed repayment schedule enables the lender to generate a secure income stream.
