Preparing the Loan Paperwork
Once your private lender has agreed to loan you money to finance your home purchase, you'll want to handle the transaction almost as a bank would. This includes drafting and signing a written promissory note and supporting mortgage documents. It's a good idea, although not required, to draft a written repayment schedule as well.

•Promissory note. Also referred to as a mortgage note, this is a legally binding document signed by you, the borrower, saying that you promise to repay the loan under agreed-upon terms. These terms, including the interest rate, payment dates, and frequency of payment, should be spelled out in the note. The note should also describe any penalties that the lender can assess if you fall behind in repaying the loan, including requiring full payment prior to the end of the loan term.

•Mortgage or "deed of trust." The mortgage or deed of trust (depending on which state the property is located in) is a legal document that secures (provides collateral for) the promissory note. It says if you don't pay back the loan, plus all fees and interest, then your private lender can foreclose on your property and use the proceeds to pay off the loan. The mortgage or deed of trust lists the currently recognized owner and legal property description and describes the borrower's responsibility to: a) pay principal, interest, taxes, and insurance in a timely manner; b) maintain hazard insurance on the property; and c) adequately maintain the property. If you fail to comply with these requirements, your private lender can demand immediate, full payment of the loan balance.

•Repayment schedule. Although a written repayment schedule is not legally required, it's both a convenient and an important way to keep up good relations with your family-or-friend lender.

After You Receive the Loan
With any luck, your income will remain stable, and you'll be organized about making payments until either the loan is paid off or you can refinance with a traditional lender. However, unforeseen circumstances might arise, causing you to run short on cash. Whatever the problem, if it's a legitimate cause for you to be late with your payment, discuss it with your lender. Get in touch as soon as possible, and by all means before the payment comes due. Your lender will likely appreciate your honesty and may help by lowering your payments, temporarily freezing them, or even forgiving some payments altogether.

That's the beauty of an intrafamily mortgage. Repayment is much more flexible than with a bank. Just make sure that you don't abuse your lender's trust -- save special requests for the true emergencies.