Once you decide who and how much you want to lend as a private money lender, what do you need to know? You need to know your numbers and documents. I have briefly discussed about the numbers in here.
Let’s talk about the documents now. There are tons of papers when it comes to loan documents. Remember when you took out your home mortgage, you have signed papers after papers. Now, the role is reversed. When you become a bank/lender yourself, what are the most important documents that protect you as a lender? The top three most important documents are promissory note, deed of trust or mortgage, and title report.
What is promissory note?
Promissory note is sometimes referred as note. A promissory note is a promise to pay when presented to a debtor at agreed upon terms. A promissory note contains details about the loan such as the maturity date, interest rate (i.e.fixed, variable, etc), amortized, interests only or balloon, payment amount, and frequency. A note is a paper stating “I owe you.” Simple as that. If someday, the borrower stops paying for whatever reason, you need to have mortgage or deed of trust to go after your collateral-real estate and file foreclosures in order to recoup your investments.
What are deeds of trust?
Deeds of trust or mortgage are security documents to secure the promissory note to the real estate to create a public record in the county in which the real property is located. This will create a lien attached to the property.
Deeds of trusts are commonly used in the states like California, Colorado, Nevada, and Texas, etc. There are three parties involved in deed of trust. a Borrower (the Trustor), a Lender (the Beneficiary), and the title company, escrow company, or bank (the Trustee) that holds title to the lien for the benefit of the lender. Trustee’s sole function is to initiate and complete the foreclosure process at the request of the lender.
Trust deeds provide the option to bypass the court system by following the procedures outlined in the trust deed and applicable state law. This is a non-judicial foreclosure or trustee’s sale. When a foreclosure sale is conducted by the trustee, title is conveyed from the trustee to the new owner via Trustee’s Deed. If there is no bidder at the trustee sale, the property will revert back to the lender and title is still transferred from the trustee to the lender using the Trustee’s Deed.
What are mortgages?
Mortgages are commonly used in the states like Connecticut, Florida, New York and South Carolina, etc. There are two parties involved in a mortgage: a Borrower (the Mortgagor) and a Lender (the Mortgagee). Mortgages are enforced by a court supervised foreclosure process called judicial foreclosure. The lender files a lawsuit against the borrower to obtain a judgment. If the sale from foreclosure auction is not enough to pay off the note, the lender can choose to sue the borrowers for deficiency judgment. However, the legal cost and time involved in judicial foreclosure are normally much higher and longer than non- judicial foreclosure.
What are title reports?
Title reports shows the status of title to real property, including a property description, names of titleholders and how title is held (joint tenancy, etc.), tax rate, encumbrances (mortgages, liens, deeds of trusts, recorded judgments), and real property taxes due. It’s important because you want to know who is ahead of you when getting paid off. If you are lending as first lien holder, you are better to be the first in the line on that report!