Private Lending Business

[Terri Austin]

I am interested in becoming a private money lender. Whom might someone like me contact in order to get an initial start-up loan/funding? Some people have told me that you need to use your own money, however I just watched a webinar which said you do NOT have to use your own money. Could someone please clarify? Thank you!

[Don Konipol]

Okay, lets establish some definitions first. A private money lender is one who lends non institutional money, consisting of either his own funds or funds to which he has the decision making authority and signature authority to lend.

A private money broker is one who acts as an agent for either the borrower or lender in transacting a non institutional loan.

A hard money loan is a type of private money loan that is totally or primarily based on the value of the collateral asset and experience of the borrower; the borrower's credit play none or only a minor role in the decision lender's decision making process.

These loans almost always carry higher interest rate and fees, and are for shorter terms than institutional loans.

Further

All loans made for a personal purpose that are secured by real property are subject to the SAFE act and as a result require that they be originated by a licensed mortgage originator.

Loans made for commercial purposes - which may include houses being purchased or re financed by investors, or someone using that money for investment purposes, are not regulated by the SAFE act. Whether the person originating that loan needs to be licensed is determined by state law. For example, a person originating commercial mortgage loans in Arizona is required to hold an Arizona Commercial Mortgage Broker license. That same person originating a commercial mortgage loan in Texas is not required to be licensed.

Legal issues also relate to the raising of funds to be invested in mortgages. Most legal opinion now holds that the "sale" of this loan opportunity represents a security, while a small minority opinion is that a loan is not a security. As a security there might be exemptions from Federal Securities laws in place for operating in a single state, private placement, etc. Many state laws mirror Federal law in this area. Some states (California) regulate private mortgage loans (trust deeds) brokers with specific rules and regulations.