Private lending documentation advice
Member since 2023 · 2 posts · 0 votes
Private lending documentation advice
Most Popular Reply
Doug SmithPro Member
Lender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votesHey @Steve Saenz. I'll do you one better. I'll tell you EXACTLY what we ask for as a lender when we begin the process and then later I'll mention the closing docs. I'll first start with our due diligence materials. but first, I highly, highly, highly recommend visiting www.optoutprescreen.com. Whenever you apply for a loan, the credit reporting agencies will give your information out to solicitors. Your phone is likely to explode with unwanted calls. To avoid this, you can first go to Opt Out Link, scroll down to “Electronic Opt Out for 5 Years”, complete the form, and submit. The major credit reporting agencies will remove you from the lists they provide to solicitors for 5 years. That will keep your phone from ringing off the hook for a while. This will take 4 or 5 days to filter through the system, so you’ll want to do this first. It will save you headaches down the road. By the way…this will be the case with ANY lender that does a hard credit pull.
THERE IS A LOT HERE, BUT LET’S TALK BEFORE YOU START GATHERING EVERYTHING UP. I’ve been quite thorough with my list below. A lender won’t need all of this for an approval, but I wanted you to know what a lender will likely be asking for. Your friends might not want or need this, but if you go to an institutional lender, this is what they'll ask for...
- GUARANTOR APPLICATION: Each owner of the Borrowing Entity will need to complete some sort of application on themselves personally. The lender will want to know about their financial background in order to underwrite the loan. For us, we give them a link into our application system. Some want a Fannie Mae form 1003. Others have their own form, but most lenders will usually want an application of some sort.
- PERSONAL FINANCIAL STATEMENT(S): Most lenders will have their own form. If you already have a form with all of this information, that’s great. They can use that, but they will need one for each and every guarantor.
- SCOPE OF WORK: Basically, a lender wants to see that you thought this through and understand the costs involved. They would love to see an itemized breakdown of the work from a licensed GC along with costs.
- ORGANIZATIONAL DOCUMENTS ON THE BORROWING ENTITY: They will need
- * Filed Articles of Organization
- * EIN Letter from the IRS
- * The fully-executed Operating Agreement for the Entity (By Laws for a Corporation)
- * Meeting Minutes Showing the Signer has the Authority to Sign and that the project has been approved by the board of the entity.
- * Certificate of Good Standing for the Entity
- DRIVER’S LICENSES FOR EACH GUARANTOR: Please be sure to get a legible picture of the front and back of the document. Make sure it is legible.
- EXPERIENCE/TRACK RECORD: A big portion of how aggressive a lender can be with their terms is your experience. We need to show underwriting what your experience level looks like. Provide them with a list of properties that you have flipped in the past including dates, addresses, amounts, outcomes, etc. That will really help solidify your experience and get you a better deal.
- BASIS FOR YOUR AS-REPAIRED VALUE (ARV): When you flip a house, it's important that you know what you are going to sell the property for. How did you determine the ARV for the property…in other words…what you plan to sell it for? Do you have a Comparative Market Analysis (CMA) or a Broker's Price Opinion that I can include with the file? It would be quite helpful. ***this is very important…don't skip getting good comps or, better yet, a good CMA***
- BUILDING PLANS, SPECS, AND QUOTES: For a construction project, they’ll need to understand the deal. Provide them with any and all building plans, specs, permits, drawings, and quotes that you might have to help us get a handle on what your project looks like.
- THE FULLY-EXECUTED PURCHASE CONTRACT: They’ll need the contract signed by all parties to get the file into underwriting if you are buying the property. If you already own it, you'll want to give them the settlement statement from when you bought the property.
- HAZARD AND FLOOD INSURANCE QUOTES/BINDERS: They will need to make sure the property is insured. Please provide us with the quote(s) or binder(s). They will at least need the agent information to work with them to get what they need.
- CONDO ASSOCIATION HAZARD/FLOOD INSURANCE DECLARATIONS PAGES: If this is a Condo, associations usually carry hazard/flood coverage as part of their association dues. We will need the declarations pages for the hazard and, if applicable, flood policies prior to underwriting.
- BUILDER’S RISK POLICY INFORMATION: If you are doing a rehab, They do need to get your builder’s risk insurance information.
I do realize this seems like a lot, but if this is given to any good lender, they'll have a pretty complete package to underwrite. Again, your friends may not want all this, but it's what an institutional lender would ask for. Now, to the docs.
Lenders will already have the closing docs, but your friends will need to have an attorney draft the promissory note, Deed of Trust (in TX or other Deed Theory States) or the mortgage in Lien Theory States like me home state of Florida, and other ancillary documents that go along with a loan of this type. DO NOT try to do that yourselves. Let a good real estate attorney do this for you and let a competent title agent/attorney close the loan. Some people try to do it themselves and they miss things. Pay the lawyer...don't skimp.
I know this is a lot, but I hope it helps. Good luck.
8 Replies
- 3yJonathan Taylor SmithBusiness MemberRental Property Investor · Durham / Raleigh (Triangle), NC · Member since 2015 · 841 posts · 802 votes
@Steve Saenz - This depends on your state (I'm in NC); however, the first time I did a private lender funded deal, I had the same attorney who was handling the closing, also write-up the deed of trust and note for the private lender. In NC, the note establishes what is owed, to/from whom and under what terms and the deed of trust binds the note to the property. From there I've repeatedly used slightly edited versions of those same docs on multiple subsequent private lender funded transactions.
Blue Chariot Realty & Management4.915 Reviews - Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes3y
This is going to take many conversations with real estate lawyers, and a CPA. There are attorney owned title companies that can help you draft up the promissory notes.
- 3yDoug SmithPro MemberLender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votes
Hey @Steve Saenz. I'll do you one better. I'll tell you EXACTLY what we ask for as a lender when we begin the process and then later I'll mention the closing docs. I'll first start with our due diligence materials. but first, I highly, highly, highly recommend visiting www.optoutprescreen.com. Whenever you apply for a loan, the credit reporting agencies will give your information out to solicitors. Your phone is likely to explode with unwanted calls. To avoid this, you can first go to Opt Out Link, scroll down to “Electronic Opt Out for 5 Years”, complete the form, and submit. The major credit reporting agencies will remove you from the lists they provide to solicitors for 5 years. That will keep your phone from ringing off the hook for a while. This will take 4 or 5 days to filter through the system, so you’ll want to do this first. It will save you headaches down the road. By the way…this will be the case with ANY lender that does a hard credit pull.
THERE IS A LOT HERE, BUT LET’S TALK BEFORE YOU START GATHERING EVERYTHING UP. I’ve been quite thorough with my list below. A lender won’t need all of this for an approval, but I wanted you to know what a lender will likely be asking for. Your friends might not want or need this, but if you go to an institutional lender, this is what they'll ask for...
- GUARANTOR APPLICATION: Each owner of the Borrowing Entity will need to complete some sort of application on themselves personally. The lender will want to know about their financial background in order to underwrite the loan. For us, we give them a link into our application system. Some want a Fannie Mae form 1003. Others have their own form, but most lenders will usually want an application of some sort.
- PERSONAL FINANCIAL STATEMENT(S): Most lenders will have their own form. If you already have a form with all of this information, that’s great. They can use that, but they will need one for each and every guarantor.
- SCOPE OF WORK: Basically, a lender wants to see that you thought this through and understand the costs involved. They would love to see an itemized breakdown of the work from a licensed GC along with costs.
- ORGANIZATIONAL DOCUMENTS ON THE BORROWING ENTITY: They will need
- * Filed Articles of Organization
- * EIN Letter from the IRS
- * The fully-executed Operating Agreement for the Entity (By Laws for a Corporation)
- * Meeting Minutes Showing the Signer has the Authority to Sign and that the project has been approved by the board of the entity.
- * Certificate of Good Standing for the Entity
- DRIVER’S LICENSES FOR EACH GUARANTOR: Please be sure to get a legible picture of the front and back of the document. Make sure it is legible.
- EXPERIENCE/TRACK RECORD: A big portion of how aggressive a lender can be with their terms is your experience. We need to show underwriting what your experience level looks like. Provide them with a list of properties that you have flipped in the past including dates, addresses, amounts, outcomes, etc. That will really help solidify your experience and get you a better deal.
- BASIS FOR YOUR AS-REPAIRED VALUE (ARV): When you flip a house, it's important that you know what you are going to sell the property for. How did you determine the ARV for the property…in other words…what you plan to sell it for? Do you have a Comparative Market Analysis (CMA) or a Broker's Price Opinion that I can include with the file? It would be quite helpful. ***this is very important…don't skip getting good comps or, better yet, a good CMA***
- BUILDING PLANS, SPECS, AND QUOTES: For a construction project, they’ll need to understand the deal. Provide them with any and all building plans, specs, permits, drawings, and quotes that you might have to help us get a handle on what your project looks like.
- THE FULLY-EXECUTED PURCHASE CONTRACT: They’ll need the contract signed by all parties to get the file into underwriting if you are buying the property. If you already own it, you'll want to give them the settlement statement from when you bought the property.
- HAZARD AND FLOOD INSURANCE QUOTES/BINDERS: They will need to make sure the property is insured. Please provide us with the quote(s) or binder(s). They will at least need the agent information to work with them to get what they need.
- CONDO ASSOCIATION HAZARD/FLOOD INSURANCE DECLARATIONS PAGES: If this is a Condo, associations usually carry hazard/flood coverage as part of their association dues. We will need the declarations pages for the hazard and, if applicable, flood policies prior to underwriting.
- BUILDER’S RISK POLICY INFORMATION: If you are doing a rehab, They do need to get your builder’s risk insurance information.
I do realize this seems like a lot, but if this is given to any good lender, they'll have a pretty complete package to underwrite. Again, your friends may not want all this, but it's what an institutional lender would ask for. Now, to the docs.
Lenders will already have the closing docs, but your friends will need to have an attorney draft the promissory note, Deed of Trust (in TX or other Deed Theory States) or the mortgage in Lien Theory States like me home state of Florida, and other ancillary documents that go along with a loan of this type. DO NOT try to do that yourselves. Let a good real estate attorney do this for you and let a competent title agent/attorney close the loan. Some people try to do it themselves and they miss things. Pay the lawyer...don't skimp.
I know this is a lot, but I hope it helps. Good luck.
- Wholesaler, Rehabber and Landlord · San Antonio, TX · Member since 2014 · 2k+ posts · 2k+ votes3y
Hey @Steve Saenz The whole process is pretty simple. I let my people know that the whole process is the same as when they bought a house except now they are the bank. But they as the bank are not going to require 100 pages of paperwork. The main items are the deed of trust and promissory note. The title company will hire an attorney to draw up these documents. WE (buyer and lender) will come to terms and let the attorney know what those terms are going to be e.g. 8% interest only, 1 year term with balloon, 200k.
The title company will file documents after closing.
- Member since 2023 · 2 posts · 0 votes3y
Wow! Thanks for all the incredible feedback. My brain just peered into a different universe and its exciting to say the least. I now have a much better understanding of how to handle this moving forward...
Thank you Rick, Doug, Elliot and Jonathan.
- Lender · Chicago IL · Member since 2020 · 358 posts · 230 votes2y
Quote from @Huyen Ngo:
Does anyone know if we can charge 15% interest for promissory note in TX?? I have someone asking $35K for 3 years and offered 15% annual return...but I looked up TX and the most you can charge is 10% without violating usury law...help???
Someone correct me if I'm wrong here - and I'm not familiar with TX - but from what I've read in IL is as long as you're lending money to an LLC / Corporation (not an individual), you can charge higher amounts (maybe even any amount you like).
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2y
Quote from @Huyen Ngo:
Does anyone know if we can charge 15% interest for promissory note in TX?? I have someone asking $35K for 3 years and offered 15% annual return...but I looked up TX and the most you can charge is 10% without violating usury law...help???
depends on what it is for. if its owner occupied loan then no, but if its a business purpose loan most states do not have usury for that type of loan. We have done HML in texas and it was absolutely above 10%
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