THINK OUTSIDE THE BANK
How Do Hard Money and Private Money Loans Work?
Understanding the hard money (sometimes referred to as private money) funding and closing process for hard money loans will give you insight into the parties involved and steps required that result in your new note investment. A lot more happens in order to get a loan closed than just signing documents and agreeing to make payments.
The parties involved in the loan funding and closing:
- Seller (for purchase transactions)
- Hard Money Lenders | Private Money Lenders – The individual or company who matches you up with loan investment. The hard money lender (also referred to as a hard money broker) manages the borrower’s loan application, processing, underwriting and coordinate your funding of the new note investment
- Real Estate Agent(s) (for purchase transactions)
- Title / Escrow Company or Settlement Services Provider
The closing process starts at the beginning of the hard money lending process.
The title & escrow/settlement services company:
- obtains information about the borrower and seller (if applicable)
- conducts a search of public records for liens, judgments, easements etc. against borrower, seller and/or property
- creates a preliminary title report that is an offer of title insurance on the property
- accepts deposits pursuant to purchase contracts
- reviews organizational documents of any entities involved and determines authorized signers
- obtains payoffs of existing liens on property
- obtains rent rolls, leases, service contracts, security deposits, property tax information etc for proration calculations
- coordinates 1031 Exchange process (if applicable to borrower or seller).
- prepares settlements statements in accordance with your instructions and purchase contract (if applicable) and receives loan document package from the lender
- coordinates and oversees the actual signing of the documents, or the loan closing
After the borrower signs the loan documents:
- The hard money lender wires the loan proceeds that you provide to the escrow/settlement services company
- The escrow/settlement services company records the deed, mortgages, etc with the Bureau of Conveyances
- The escrow/settlement services company disburses the funds to all appropriate parties
- The title company issues title insurance policy
The application, the review for approval, through the loan processing then to loan closing can often take few weeks instead of many weeks from the conventional banks.