Trust Deeds: Private Money Lending

Private money lending is a non-institutionalized, short-term real estate funding opportunity that uses the protective equity of the property as collateral for the loan.

There are a number of professional companies that specialize in providing loans that may not be available through traditional lenders. In other words, they obtain money from a variety of sources for trust deed investments. Sometimes the funds for “hard money lending” as it is sometimes called come from individual investors. Other times the money is obtained through hedge funds, IRAs, trusts, pension plans and REITs among others.

Borrowers who fail to qualify for the guidelines of a conventional loan from a bank require private money lending. Although an investor’s credit and income may be sufficient according to traditional guidelines, the classification of a trust deed loan as “sub prime” prevents the lender from granting the loan. Thus private money lending provides an attractive and reasonable solution with more lending options.

Companies who handle the specific needs of a private loan solicit, underwrite, process and fund private money lending and are safe and reliable. Naturally you would be wise to choose a company with a sterling reputation, possibly recommended by other investors.

Not all lenders will offer the same services but all understand the complexities of a trust deed transaction and creative financing. In general they provide underwritten, direct loans for borrowers. Therefore, they fund the loan internally after assessing the risks personally, instead of outsourcing to retrieve information. In this manner the terms of the loan can be adjusted accordingly and the loan granted within hours instead of days or weeks once the application has been submitted.

Private money lending companies offer unique opportunities for investors. The loan is first secured with a deed of trust on real estate and supported with the borrower’s personal guarantee. A Title Insurance Company that is known nationwide with a good reputation is responsible for insuring the deed of trust. The borrower pays for any costs incurred in the process of underwriting, documenting or servicing the loan.

The decision to fund the loan is based on the amount of equity in the property. This is the first assessment an asset-based lender will make and if that requirement is met, then the borrower is analyzed—his integrity, ability to repay the loan and whether the project is a viable one.

An officer of the lending company will personally inspect the property before a final decision to grant the loan will be made. Property values and appraisals are often confirmed in house by using sales analysis through interviews by real estate brokers who know the area.

Individual investors comprise by far, the funds for the majority of loans granted by most non-institutional lending companies. Each investor is provided with details of the loan summary including the terms of the loan, property to be used as collateral and information about the borrower.

Investors are supported and assisted through every stage of the loan process; another attractive feature of trust deed investing.