How to Become a Hard Money Lender
In order to become a hard money lender, also called a trust deed lender, there are several things to think about. Before you start lending your money, get started on the right foot.
A private money loan is any loan from a non-bank source. A hard money lender is one type of private money lender that uses “hard” assets as collateral for loans. The most commonly used asset for hard money loans is real estate. In order to become a hard money lender, there are four important things to consider:
1. Do you fully understand how trust deeds work? Further do you understand the foreclosure laws in the State you are lending in? If not, it’s crucial to find a good attorney, specifically a real estate attorney or other attorney who has specific experience with trust deed lenders.
2. Do the new laws in the State you are lending in allow you to make loans without a license? Before you start lending your own money, make sure you’re following regulations under your State laws. For commercial properties with 5 or more units, there are no licensing requirements for lending one’s own money. But in certain States, lending your own money on residential real estate is prohibited unless you have a mortgage license yourself, or unless your loans are originated by a licensed mortgage broker. If you’re unsure, don’t ask your attorney in this case but rather call the Divisions of Real Estate and/or Mortgage Lending at your State level and talk to someone about what type of lending you plan on doing. This is the fastest and cheapest way to make sure you aren’t required to have a license to lend your own money in a particular State. Because every State has different licensing requirements, don’t make assumptions that you don’t need a license, even if you’re lending your own funds.
3. In what form will you lend your funds? E.g. as an individual, as an IRA, as a Limited Liability Company, as a Trust? Decide how you will lend your money. Will you lend from your personal funds in your individual name? Or will you make the loan as a business entity such as an LLC using funds from a business account.
4. How well do you understand real estate, or are you comfortable owning real estate? Should a property go into foreclosure you may have to own a property, at least for a short term. Unless a broker or other third party will manage the asset until it sells, a foreclosure can mean being a property owner. If you must fly to where the asset is located, this is something that will have to be considered should you have to own a property.
So how does one become a hard money lender? Start by carefully considering the four items previously listed, and certainly consult with an attorney if you don’t understand the ins-and-outs of trust deed lending. Although you certainly don’t need an attorney to hold your hand on every loan, it’s certainly wise to consult with an attorney at the outset. An attorney will also prepare your loan documents; these are the documents necessary for making a trust deed on real estate.
In order to become a hard money lender, make sure you set out on the right foot and do things right. Understand the process, understand your legal requirements, and feel comfortable about the collateral and where it’s located. Most important take things slowly as becoming a trust deed lender won’t happen overnight. If you try and rush into it, the result may be disaster, so take your time and do your homework.