Private lending paperwork

I am located in Pennsylvania. I have been investing in real estate for about 12 years, and I am thinking about doing some private lending.

At some of the REIA meetings I have attended, I have spoken to people who are doing private lending using the following 4 documents.

  1. Mortgage - Standard Fannie Mae document downloaded from the Fannie Mae website and which gets recorded in the local County Recorder of Deeds office
  2. Note - Again a standard balloon note document downloaded from Fannie Mae’s website.
  3. Deed in Lieu of Foreclosure - This is signed by the borrower and notarized and transfers the deed for $1 should the borrower default
  4. Personal Guarantee - pledges all assets of the borrower.

My questions:

  1. Are these documents sufficient to protect the lender?
  2. As I understand the Deed in Lieu of Foreclosure, if the borrower defaults, the lender simply records this signed and notarized document in the Office of the Recorder of Deeds, and the property then belongs to the lender. Is that a correct understanding of that document? Does it really save the lender from having to go through the foreclosure process?
  3. If these documents are not sufficient to protect the lender, what other documents would you recommend?

Thanks in advance.

Lots of law to consider

First I’d advise you to do pvt lending ONLY on NOO deals i.e to REIs only as in the OO area these days the feds and states have almost legislated that away.

So I’d make any borrower with a good-sounding deal give me his affidavit that his deal is an REI deal only and he won’t be living in the property; also get his FICO and fin statement so you know he’s capable of paying you.

Re the taking of a DIL, a lender on a 1st mtg or DOT needs to be very careful to ascertain that there is no subordinate mtg or DOT as those would not be closed out by a DIL…but those would be washed away if lender does full legal non-judicial or judicial foreclosure on mtg or DOT.

A followup

Thanks for the reply. However, forgive my ignorance, but what is a NOO deal and what is the OO area? Also, what is a DOT?

If I did a private lending deal, I would ONLY lend to people I have met through the REIA meetings, who have been long time investors, and who I know to be “stand up” investors. I would ALWAYS be in first position on the mortgage. If I understand you correctly, you are saying that even if my loan is in 1st position, the borrower could have a 2nd or 3rd lien against the property which would NOT be closed out by the Deed in Lieu, meaning that, if I recorded the DIL, I would be subject to those other liens. Thanks, since that is something I had not thought about. Is there a way to preclude the borrower from taking out a 2nd or 3rd behind my lien? Regardless, other than that possible problem, are the documents I listed sufficient to protect the lender? Thanks in advance.

Some answers

First some definitions:

DOT deed of trust which is mortgage form in a number of states and which allows for out-of-court, non-judicial foreclosure if loan is delinquent.

OO is owner occupied, NOO is NON-owner occupied.

Recent federal law and regs have pretty much taken over all OO loans so those are to be avoided, leaving the NOO area the far safer lenders’ area today.

Candidly it sounds like you’re over your head in this area of pvt lending and I’d urge you not to get into it without a knowledgable RE (real estate) wise lawyer to hold your hand and make sure you’re adequately protected on any loan you make.