How to structure lending deal between 2 individuals

Question

After getting charged between 12-15% interest I finally connected with someone who has "their own money" rather then a traditional hard money lenders and companies. So rates and terms will be better.

In the past - my old hard money lender had all the contract documents, documents for title company ect... The guy who is going to lend me money has never really done anything like this so would we still take the same steps?

For instance - In the past I buy a house, my HML gives the title company closing instructions, he is listed on the HUD, and wires the money to the title company on closing.

Now that I have essentially a guy with cash in the bank does he need to deal with title company? Or should we just draft a contract and have him wire me the money directly. He seems open to whatever - With my old HML, systems were in place, now we are making the rules as we go so looking for guidance.

Kyle J. · Answer

@Adam Craig If title companies handle the closings in your state like they do in mine, then you'll still go through the title company.

Your private lender will need to have the paperwork drawn up by his attorney and provide those to the title company.  The title company will tell you they can draw up the paperwork, but it's generally not recommended to have them do it. (Here's a post on BP from an attorney with more discussion on that: https://www.biggerpockets.com/forums/49/topics/555773-what-is-the-happy-path-for-a-private-money-lending-transaction?page=1#p3375602.)

The lender's cost of having the loan paperwork drawn up would typically be passed along to you, as the borrower, at closing.  So just be prepared for that.

No lender should ever wire funds directly to you.  They should be wired to the title company who then disperses them at closing.  The title company would also handle the recording of documents.

After closing, the lender could either service the note himself (i.e. collect payments directly from you), or there's companies out there that do it for a small fee.  However, it's not that difficult to self-service the note, especially if the terms of the note are interest-only and there's no amortization schedule to figure out.

John Thedford · Answer

Have an attorney handle the paperwork and closing. He can file the docs on your behalf.

Kenneth Garrett · Answer

@Adam Craig

I agree with @John Thedford hire an attorney to protect both of you.  When I use private lenders it’s a note and mortgage and the funds are wired directly to the title company.  The title company will provide the wiring instructions.  Your private lender will then provide the letter of direction on the funds.  It’s important to protect your private investor as if it were your grandmothers money.  For less than $1000 your attorney can prepare the documents properly.

Good Luck.

How to structure lending deal between 2 individuals

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