How to find a contract for private lenders

[Elizabeth Aguilera]

We are ready to borrow from private lenders who have agreed to work with us. We need a contract to borrow the money and to lay out the terms of the loans. Is there a template on BP? I looked but did not find one. Or what is your best advice for creating a contract that covers all the bases of a private loan? Also, what if the lender and the borrower and the property are in three different states? Does that play into the way the contract is set up? Thank you! 

[Alex Breshears]

Hi Elizabeth! 

I am going to caution you here just for a second.  In order to protect everyone these things should be considered and acted upon accordingly to do a private loan well and have it be successful.

1) The property MUST be non-owner occupied, this includes STR properties where the owner will be using the property. There is no bending the rules on this one. It MUST be non-owner occupied.

2) There needs to be a title search done, this will likely open escrow with a local title company. Read the title report, make sure you are ok with the exceptions and that clear title can be transferred to you as the new owner.

3) Lender's title insurance is a must. It needs to be 125% of the loan amount. Again, do NOT bend this rule.

4) appropriate hazard insurance needs to be acquired. It should cover at least the loan amount. If the structure insurance will not cover the loan amount, the borrower may need to pay to over insure the property.  Actual cash value (ACV coverage) is what I prefer as a lender versus RCV coverage. Not all properties will qualify for ACV, but something to keep in mind. Also the right type of insurance. If this is going to be undergoing renovations you may need a builders risk policy as opposed to just straight hazard insurance. The lender will be added as a mortgagee to the policy, so should it lapse or have a claim, they are notified.

5) Another DO NOT bend rule. Get an attorney familiar with lending in your state. This may not be the real estate attorney you closed your personal home with because they get emailed documents, not generating them. Have the attorney draw up the promissory note and lien instrument (deed of trust or mortgage depending on state), along with any additional disclosures needed for your state or the way the lender wants to have things set up.

6) The lien instrument will show up on title because it MUST be recorded. Generally the closing company does this for the transaction and then sends the original recorded document to the lender.

7) I will advocate for a loan servicing company to be involved in payment collection and disbursement monthly. That way there is no discrepancies on when and how much was paid and what it went towards in the transaction. They will also likely do the 1098/1099 needed at tax time at the end of the year for you.

8) Keep communication with your lender. Let them know what's going on, even if it is an unforeseen problem. We likely want to be in the know on what's happening!

I am one of the authors to BiggerPockets latest book - Lend to Live.  It will walk you through the whole process step by step. It may be a good idea to read through that to understand what can be expected and what you need in place. You can learn more about the book here: https://store.biggerpockets.co...