First time private money borrowing, need guidance!

[Iaroslav Demydovych]

I am in Lancaster Pennsylvania! I am looking to borrow some private money and I have couple people that want to land me money. Can someone please explain the legal process so I do everything right? thank you!

[Jeff S.]

The first person to record a mortgage against your property is in first position. The next person to record is in second position. Since they can be wiped out by the first, second position loans are very dangerous and not for anyone who doesn’t know what they are doing – typically a professional. So, borrowing from several individuals on one property might not be as easy as you think, @Laroslav Demydovych, if that’s what you’re doing.

On the other hand, if your state allows fractionalized loans, where there are several lenders named on one recorded loan, they can all enjoy the safety of a first position mortgage. Or, you should just borrow from one person per property. I assume this is a business-purpose loan and not something you will be living in (i.e. not for personal, family, or household use). Some clarification would help.

Like everything else, after you’ve done it a few times, the lending process for business purpose loans is easy but not for a first-time do-it-yourselfer. Your lenders are the bank and should act and be treated that way. This means professionally prepared paperwork, not the least of which is a note and mortgage, lender and owners title insurance, fire/hazard insurance appropriate to what you are buying (flip, buy and hold, multi-family, etc.), lender instructions, use of loan proceeds, lots of disclosures, perhaps a personal guarantee and 1003, and several others. These would be prepared by an attorney, knowledgeable about private loans, who your lender(s) would meet so they could ask questions and know what they are getting into. You’d be advised to sit in, to learn as well.

Closing would be done by the attorney, title, and/or escrow, as is customary in your state.

When it comes time to pay your loan off, your lender would list the amounts owed (principal, unpaid interest – including the daily rate, other charges) and send this to title or escrow who would pay them off from your refinance or sale proceeds. They would then send Title the original note, original mortgage, and whatever document is used to reconvey (cancel) the mortgage in your state for recording.

Very straightforward and repetitive. Just takes a bit of easily obtained education.