Friend to Friend Loan - Needed in Writing for a Mortgage

Zelfer

Hi.

Due to a difference between the mortgage valuation and our accepted offer :mad: a friend of ours has very kindly offered to lend us half of the shortfall over 4 years, with us covering the rest. (We didn't ask for this, but are very grateful for the offer). This is on the basis of the current interest rates are pants so their cash is doing nothing for them, and they want to come and visit! We're at a mortgage LTV of 65%, so equity isn't really a problem.

The mortgage company have asked us for a written agreement from the friend with all parties signing it that they have no interest in the property and that it is unsecured against the property.

I also want a written agreemeent so that in the event of our death, the friend is able to produce the bit of paper and recover the outstanding money from the executor of the will.

Is there any specific wording that we should include in the agreement that would cover the points above to the satisfaction of an executor of the will and the mortgage company?

Thanks.

bigadaj

What you are asking for is obviously contradictory, why do you need the loan from the friend if your ltv is so low? Any arrangements would be fraudulent.

The only potential way round this might be to amend your expression of wishes on say a pension to payout in favour of the friend for a specified amount.

Either that or take out life insurance in favour of the friend for the specified amount.

A gift is a gift, and a loan is different.

Zelfer

bigadaj wrote: »

What you are asking for is obviously contradictory, why do you need the loan from the friend if your ltv is so low? Any arrangements would be fraudulent.

The only potential way round this might be to amend your expression of wishes on say a pension to payout in favour of the friend for a specified amount.

Either that or take out life insurance in favour of the friend for the specified amount.

A gift is a gift, and a loan is different.

Sorry, probably not clear enough. We placed an offer on a property at £300k, it was valued at £290k, so a mortgage valuation shortfall of 10k. We have 105k deposit available through sale of our current home, so need 195k mortgage. (65%)
However valued at 290K, we can only borrow 188.5k on the same mortgage agreement (65%LTV is the requirement) , so 7.5k shortfall. If we now re-negoiate the mortage to change the LTV, we are charged an extra .39% for the same fix, plus lose the fee's we've already paid, meaning we can't afford it on the affordabiltity scale, so we will get turned down, and the whole thing collapses.

So basically we're trying not to do that. We've already negioated 10ks worth of repairs with the seller, so can't go further there, and we can't appeal the valuation.

It's definately a loan.

Thrugelmir

Lender won't accept a loan arrangement.

da_rule

I would suggest that you get your friend to sign an agreement. Assuming you have instructed a solicitor, get your friend to give you the money and pass it on to the solicitor. The solicitor can then provide an undertaking that he has the money. This should more than satisfy the mortgage company.

Any letter you write will not outweigh the provisions in your will, so you need to amend the will, although he will be a creditor, so he may be able to make a claim, but thats a bit of a faff. As people have already said perhaps an insurance policy with him as a beneficiary, you can then cancel this once the debt is paid.

da_rule

Thrugelmir wrote: »

Lender won't accept a loan arrangement.

The OP said in his original post that the mortgage company have asked for a written agreement. This assumes that they know its a loan from a friend, rather than a bridging loan from a finance company (which they may likely assume unless the OP has been explicit that the money is coming from a friend).

Zelfer

da_rule wrote: »

The OP said in his original post that the mortgage company have asked for a written agreement. This assumes that they know its a loan from a friend, rather than a bridging loan from a finance company (which they may likely assume unless the OP has been explicit that the money is coming from a friend).

Yep, i had discussed this with the mortgage company when they told me they were undervaluing us, I then had a discussion with them regarding options, including taking out a loan to cover the shortfalls, and what impact that would have on their offer, and said i would get back to them on a decision within 2 weeks while i investigated my options.

Then our friend offered the difference, and since it's friend to friend comes with no interest, and we can repay it back at the same price per month as the 10k extra from the mortgage company would have cost us, so it's cost neutral to the application at least for the first 2 years, so we are very, very grateful for the offer.

And yes, I was then clear & upfront to the mortgage company that this was a loan from a friend, rather than savings that had been "found" and wondered the best way to proceed was, and this was their suggestion.

bigadaj

da_rule wrote: »

The OP said in his original post that the mortgage company have asked for a written agreement. This assumes that they know its a loan from a friend, rather than a bridging loan from a finance company (which they may likely assume unless the OP has been explicit that the money is coming from a friend).

Still potentially fraudulent and illegal.

Zelfer

da_rule wrote: »

I would suggest that you get your friend to sign an agreement. Assuming you have instructed a solicitor, get your friend to give you the money and pass it on to the solicitor. The solicitor can then provide an undertaking that he has the money. This should more than satisfy the mortgage company.

Any letter you write will not outweigh the provisions in your will, so you need to amend the will, although he will be a creditor, so he may be able to make a claim, but thats a bit of a faff. As people have already said perhaps an insurance policy with him as a beneficiary, you can then cancel this once the debt is paid.

Yes, it is that agreement that we are trying to write up now, written in plain English for a friend to friend transaction.

Thanks for the information regarding the use of a letter/agreement vs a will - Having just paid out to get our wills updated, i didn't really want to get it updated again for a smallish amount of money, and was hoping that a letter showing he was a valid creditor would have been enough, and would therefore been able to go through due process. I'll take a look at an insurance policy, but not 100% sure it's worth it as it'll push our outgoings up again

I guess in reality, the loan is effectively secured against the house in all but name, or at least that is the security that our friend has in case something happens to us.

Zelfer

bigadaj wrote: »

Still potentially fraudulent and illegal.

Sorry, i don't understand ; In what way is this fraudulent and illegal?
You've mentioned this twice, but i can't see how this is the case.

Clive_Woody

bigadaj wrote: »

Still potentially fraudulent and illegal.

Unless I am missing something where is the fraud? Who is being misled here? What do you feel is illegal about borrowing money from a friend?

The mortgage company appears to be okay with this and the OP states that it has been clearly explained to them and they were the ones requesting the letter. All parties are aware of the situation and seem to be comfortable with the arrangement.

I know that normally people on here state that mortgage lenders will not accept a loan as a deposit but in this case the financial arrangements are such that there is a large amount of equity in the property based on the mortgage (which would be secured on the property) as well as a large deposit with any subsequent loans unsecured and therefore down the pecking order if the OP did default.