being the lender on a mortgage

Private Lending & Conventional Mortgage Advice
10yFollow

being the lender on a mortgage

Richard Glen
Chicago, IL · Member since 2016 · 14 posts · 3 votes

In Cook County Illinois.

Can I do this?

I am considering giving a loan to a guy that bought a two flat for cash and is stalled 1/2 way with his rehab for lack of cash.  It will be a owner-occupied two-flat but he can't do a 203k because it is not habitable.  Portfolio lenders have similar issues in providing him with a construction loan.

Ideally the loan would be a properly recorded mortgage with a lien such that it would be paid off when he completes his project as part of the refinance.  I don't want the refinancing lender to have any concerns that it clouds title after closing.

In Illinois, there is an additional requirement to record either a Certificate of Non-Predatory Lending (if you are a bank etc) or a Certificate of Exemption for Non-Predatory lending.

One attorney has told me that I cannot record a mortgage without having a mortgage broker license. However how do hard money lenders do this then?

Perhaps I just need to find the right attorney or mortgage broker to help with this?

Here are a few links:

https://www.ilapld.com/Overview.aspx

https://www.idfpr.com/FinLit101/SB1167/PrivateMort...

https://www.idfpr.com/finlit101/SB1167/SB1167FactS...

0Reply
56 views

Most Popular Reply

Jeff S.
Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
10y

To completely and unfairly overgeneralize, @Richard Glen, rescue loans are almost always dangerous and never a good idea. Certainly, there are more qualified borrowers you could find to loan to?

In this case, you are making a consumer purpose residential loan and will need a broker licensed to do these. In addition to anything the state of Illinois needs, your broker will have to be an MLO with an NMLS license (look those up) and there will be many other restrictions.

Dodd-Frank, TILA, RESPA, the SAFE Act, and many other laws will apply. Your borrower will have many hoops to jump through; including showing he has the capacity to repay you. If he is in trouble now, how will he do that? What assurance do you have that he can repay you at all and how did he get into trouble in the first place? Most importantly, do you understand the limitations foreclosing on a homeowner in your state?

I wouldn't touch this even if it were a standard business purpose flip. As a consumer purpose residential loan, I'm guessing with no lending experience on your part, I suggest you stay far clear of this one too. There's a reason why even most experienced hard money lenders don't make consumer purpose loans – especially loans as this.

One option for your potential borrower might be to give up living there and turn this into a simple flip. Perhaps even transferring it into an LLC. Maybe sell it as-is to a flipper. Or, get an equity partner. Just some thoughts.

To answer your other question, it's state specific, but in those states that require a broker for a particular type of loan, hard money lenders will generally hire a broker of record to do their origination. We do. You might read this thread: Private Lending Rules.

Be careful, Richard. You can do better.

1Reply
See this reply in the discussion

7 Replies

Jump to latestLatest
  • Jeff S.
    Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
    10y

    To completely and unfairly overgeneralize, @Richard Glen, rescue loans are almost always dangerous and never a good idea. Certainly, there are more qualified borrowers you could find to loan to?

    In this case, you are making a consumer purpose residential loan and will need a broker licensed to do these. In addition to anything the state of Illinois needs, your broker will have to be an MLO with an NMLS license (look those up) and there will be many other restrictions.

    Dodd-Frank, TILA, RESPA, the SAFE Act, and many other laws will apply. Your borrower will have many hoops to jump through; including showing he has the capacity to repay you. If he is in trouble now, how will he do that? What assurance do you have that he can repay you at all and how did he get into trouble in the first place? Most importantly, do you understand the limitations foreclosing on a homeowner in your state?

    I wouldn't touch this even if it were a standard business purpose flip. As a consumer purpose residential loan, I'm guessing with no lending experience on your part, I suggest you stay far clear of this one too. There's a reason why even most experienced hard money lenders don't make consumer purpose loans – especially loans as this.

    One option for your potential borrower might be to give up living there and turn this into a simple flip. Perhaps even transferring it into an LLC. Maybe sell it as-is to a flipper. Or, get an equity partner. Just some thoughts.

    To answer your other question, it's state specific, but in those states that require a broker for a particular type of loan, hard money lenders will generally hire a broker of record to do their origination. We do. You might read this thread: Private Lending Rules.

    Be careful, Richard. You can do better.

    1Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    10y

    @Richard Glen, if you don't trust the "guy" enough to just say, here's the needed funds - pay me back later (on whatever terms you shake hands on), then I suggest: don't do it.  

    Or, if the needed funds are a significant portion of it's value, how about negotiating to become an equity named partner on title? Otherwise, just steer him towards HML? Cheers...

    0Reply
  • Richard Glen
    OP
    Chicago, IL · Member since 2016 · 14 posts · 3 votes
    10y

    I Brent and Jeff,

    I appreciate the advice and questions!

    Brent yes I actually do trust the guy and have a long track record with him.  I have used his plumbing company for years as a sub on our properties and he has good cash flow and is consistently honest.    The issue isn't whether he will repay but instead ensuring that the loan won't cause an issue with his refinance.  Another option is indeed to do it as a personal loan, but even with a solid borrower I would always insist on a contract clearly defining terms and, ideally it would be collateralized by a lien on the property.

    Richard I don't think I would categorize this as a rescue loan.  The ratio between the loan and the property value (~1:5) along with decent credit and very low debt as well as good income makes it more of a construction loan that he should have taken out at the start of the project.  It would speed the project to completion rather than him delaying for a few more months to put more cash in.  He has done the project completely out of pocket so far and with high quality and low cost and no debt.  His post rehab appraised value will be about 5-6 times the amt of our loan and his single tenant will cover most of his carrying costs once he puts it in service.

    I would structure the loan such that he receives it in draws based on completion of the remaining rehab.

    We will be meeting with a mortgage broker soon to ensure he is pre-approved for the expected refi mortgage with my loan taken into account.

    Issue remains that it seems we won't be able to write it as a recorded mortgage.  Can anyone weigh in on how this could be achieved in Cook County Illinois per Richard's suggestion?

    0Reply
  • Richard Glen
    OP
    Chicago, IL · Member since 2016 · 14 posts · 3 votes
    10y

    Success!

    If someone says it can't be done, but can't give a cogent reason why, they are often wrong.  : )

    I had to call about 15 attorneys before finding one that understood the process in Illinois and then identify a title company that would take care of the certificate of non-predatory lending exemption and title insurance.

    The process is pretty straightforward:

    • Have your attorney draft the mortgage
    • Have your attorney work with the title company (In Illinois National Title Solutions will insure you to be in the first lien position)
    • Close with your borrower

    The borrower paid all costs out of their loan amt at closing:

    • Title insurance: $600 (included cert of non-preditory lending exemption)
    • Closing fee: $300
    • Recording fees: $90
    • Attorney's fee: $750

    I'm happy to provide details if anyone is interested.

    2Reply
  • Vincent IncoperoPro Member
    Attorney · Elmhurst, IL · Member since 2016 · 255 posts · 161 votes
    10y

    Richard, 

    The process of properly perfecting a private mortgage against the collateral, and thus insuring the  priority of your lien, is a tedious available option. The apld exemptions are straightforward and any attorney who focuses on real estate should be able to get the task completed with the assistance of any title company, large or small. The biggest hurdle is the apld certification of exemption. 

    [email protected]630-299-7600
    0Reply
  • Richard Glen
    OP
    Chicago, IL · Member since 2016 · 14 posts · 3 votes
    10y

    Hi Vincent,

    Indeed it was tedious the first time.  Second time would be a breeze.

    0Reply
  • Richard Glen
    OP
    Chicago, IL · Member since 2016 · 14 posts · 3 votes
    6y

    Hello all!  Wanted to close the loop on this thread with the outcome of the deal.  The borrower paid regularly every month and completed his project.  He paid in full and I would definitely do it again with this borrower.

    Over 34 months, the $35,000 loan earned $10,972.57

    I've done a few more of these kind of loans with good results.  If the project is an investment (ie not owner-occupied), the mortgage process is a lot easier and cheaper because it is exempt from the non-predatory lending affidavit.  The legal fees are about $500 and it takes just a few days to put everything together.

    Best of luck to all!

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free