The borrower can save thousands of dollars by eliminating the loan application fees and bank processing fees. Working directly with friends and family, the buyer no longer pays for the professional services that lenders employ throughout the lending process.
No private mortgage insurance (PMI) required. Even if you borrow 100% of the purchase price from family and friends, they will not make you buy PMI to protect the money that they are lending you.
The typical 30-60 day mortgage application process could be reduced to a week if you have good credibility with your family and friend lenders. The level of verification of your savings and income documents will be minimal.
If you have borrowed money from family ready to be deployed immediately, the seller may be able to lower their selling price to you instead of a potential buyer who is still in the process of shopping for a mortgage loan. The seller may be looking for a quick sale at a lower price instead of waiting a couple months for a buyer to go through a traditional bank lender.
The interest you pay back on a loan from family can be treated the same as the interest paid back to the bank lender. It is tax deductible as long as it is properly documented. Consult with a tax professional or accountant.
A buyer could negotiate for a lower interest rate on a loan from family than the set rates from borrowing at a bank. In return, the lender gets a higher return on their money than if it were sitting in a savings account.
Loans from family offers a lenient repayment schedule. When you encounter hard times, and may not be able to make repayment on the loan from family, they will not be looking to foreclose on your home on a missed repayment. This is not an open for you to default on future payments, as your credibility towards family and friends are always on the line.
There are many benefits with borrowing money from family and friends as long as the borrower maintains a high degree of integrity and credibility by always repaying on time and always sticking with the terms of the loan agreement from family and friends lending you the money.
The estimated savings could be calculated by crossing out some of the closing cost line items if you were to borrow money from friends and family instead of going the traditional route with a bank or lending institution. See closing cost examples.
Before you ask for a loan from family, come up with a list of benefits for the family lender as well.
- Higher return on their money
- You are a credible and low risk borrower
- You will always be grateful for their support
- Keep wealth in the family
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