Private money lending

[Elizabeth Danks]

I would like to take a loan from a family member, and wonder what documentation I would need. I am planning on having them be the lienholder on the property, with a fixed interest rate and no payments until I sell the property. The property I want to buy is a rehab, so extra funds will be included to fund the construction.

[Jon Holdman]

I strongly recommend using an attorney to set this up the first time.

Typically you will use a "promissory note" and either a "mortgage" or "deed of trust". The promissory note, or just "note", outlines the details of the loan and its terms. It is not recorded. It is signed by both of you and is the agreement between you.

The mortgage or deed of trust gives the lender (the "grantee" on the document) a security interest in the property. Its given by the borrower ("grantor"). This document is recorded. It formalizes the lender's interest.

The best way to do this paperwork is at the title company (or attorney) where you do the purchase closing. Its just a few more papers in the stack you will sign. The lender sends their money to the title company and then the title company distributes it according to the documents.

But are you getting a first mortgage to buy the property? Is the first lender aware of this second mortgage? If not, they may disallow it if it causes the total amount borrowed to exceed their guidelines. If this is the case, you may have to get this second loan after the initial purchase. Sort of like buying a house then later getting a HELOC. In that case, it would still be best to use a title company to ensure all the correct documents are filed.

The final step is that when you sell, the lender will file a "release of lien" to remove the lien from the property. They will provide their payoff amount to the title company handling the closing when you sell and will receive their payoff from the title company.