How do I formalize this private loan

6 Replies

I have an offer from a friend of my father to loan me $25,000 at 5% over 5 years.  The money will be used as a down payment on a duplex I am looking to purchase.  I am financing the remaining 75% with a traditional mortgage company. 

How would you make this a formal loan - Do you just write up a simple promissory note and attach a loan amortization table to it showing what the payments will be over the 5 years.  Perhaps get the promissory note notarized? Is there anything I need to formally file against the property?

When I make the monthly payments should I send a monthly statement or end of year statement - something to prove I have been making the payments?

Thank you for any guidance on this - very new to taking on any private money.

Allison

Not giving legal advice, but you shouldn't have to record a promissory note.  I don't know your states laws, but getting it notarized is always a good idea, and have 2 witnesses. If your dads friend wants a mortgage to secure his promissory note, you will need to have that recorded as a lien against the property.

I keep a card for each one of my loans that I can easily see all of my balances and payments. 

Also ask for receipts/statements from the lender showing your payments. You don't need to send him anything, you need to get documentation of payments from him.

It depends what your father's friend and you agree on. You can make it "unsecured" or "secured." If unsecured, notarize two copies (no need to file downtown). If secured, you'll need to have a mortgage drawn up and filed at the courthouse. Unsecured would be way easier/cheaper.

Will the lender for the traditional loan let you borrow the down payment?

There are companies that will service loans between family(and I think friends) - it may be worth the costs of going that route.

For a 2-4 unit property you will need a minimum of 25% down for (most) conventional financing (20% for SFR's) this will have to be sourced and seasoned for 60 days, your max CLTV (Combined Loan To Value) will be 75%.

What does this mean? 

Source and Seasoning the Down Payment: Conventional lenders (for the most part) will require that you verify, that, for AT LEAST 60 days, you have had: either the funds in your account OR you have earned (maybe a bonus at work, business profits, ect) or are entitled to funds (retirement savings account, inheritance, award prizes, proceeds from the sale of an assett, ect) and can prove where you obtained those funds from to show they are not a new debt or ineligible funds (funds that can't be sources or borrower funds).

As to the LTV/CLTV: you will not be able to have the agreement between you and your fathers friend recorded against the property at time of closing, because of the CLTV restrictions, you can borrower 60% from conventional financing and get a 15% 2nd mortgage from your fathers friend, but, this would not normally make sense to do since the 1st mortgage is willing to go to 75% anyway. The restriction requires that you as the buyer has "skin in the game" to ensure that the 1st lien holder is not the only one at risk. In theory you could record the agreement after the fact, but, you do increase your risk of the lender calling foul and possibly being accused of fraud (not saying you would be convicted or charged, but it is possible), depending on how soon after the closing you record the agreement and when the agreement was dated, ect....

Always good to have the agreement in writing and witnessed/notarized is a good idea, recorded against the property is much safer for the lending party, but may make the financing of your intended property a bit more difficult if they expect to have this done through the closing of the loan and you are using a conventional lender. I can't tell you how to structure the deal so you can defraud the lender you will be using (I don't wish to put any licensing at risk), but, I'm sure there is a way to accomplish your goals if you were to structure this correctly, now, that you know what the problems are, that you are going to face.

If he is willing to be on the title, it might be simpler for him to provide the down payment and you could include a buy-out agreement for his share after 5 years - it works out to just under 32K.  He also should be entitled to a portion of the profits before the buy-out.

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