Understanding the hard money (sometimes referred to as private money) process for closing hard money loans. We will give you insight into the parties involved and steps required that result in your new note investment. A lot more happens behind the scenes in order to get a loan closed than just a borrower signing documents and agreeing to make monthly payments.Private money | hard money lenders will keep you advised as this process progresses and you finally fund the loan, the security documents are recorded and the transaction is closed.
First let’s look at the parties involved in the loan funding and closing:
- Seller (for purchase transactions)
- Hard Money Lenders
- Real Estate Agent(s) (for purchase transactions)
- Title Company
- Escrow Company or Settlement Services Provider
Borrower – The individual or legal entity for which the individual has authority to convey property. If an individual is acting on behalf of an entity such as a limited liability company (LLC) or a corporation, they must prepare a resolution granting specific authority to act on behalf of the entity.
Seller – The individual or legal entity from which the borrower is purchasing the property (If applicable).
Hard Money Lenders | Private Money Lenders – The individual or company who matches you up with loan investment . The hardmoney lender (also referred to as a hardmoney broker) manages the borrower’s loan application, processing, underwriting and coordinate your funding of the new note investment.
Real Estate Agent(s) – Licensed agent (also may be an attorney) who represents either the borrower/buyer and/or seller for purposes of sales term negotiations and contract execution. (If applicable)
Title Insurance Company – Provides a preliminary title report on the subject property(ies) offered as collateral for the loan. This report is compiled by searching the county and public records for all information, liens, judgments, easements, etc against the property as well as the borrower and/or seller.
Escrow Company or Settlement Services Provider – A neutral 3rd party that collects and disburses the funds as directed by you, the investor, oversees the final signing of all applicable deeds and loan documents and document recording with the appropriate county office. In most western states this is a separate department of the title company and the services are performed by an escrow officer. In the eastern half of the US the role of the escrow company is referred to as settlement services and performed or overseen by an attorney.
What happens before the borrower signs loan documents?
The closing process actually starts back at the beginning of the hard money lending process. The private lender, or sometimes the real estate agents orders title and escrow services and that starts the ball rolling.
The title company:
- gathers information about the borrower and seller (if applicable).
- conducts a search of county 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.
The escrow/settlement services company:
- 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”. Depending on local practices and the seller’s location, the seller may close simultaneously with the borrower or may close separately at a different time and place (if applicable).
What happens after the borrower signs the loan documents?
- The hardmoney 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 county.
- The escrow/settlement services company disburses the funds to all appropriate parties.
- The title company issues title insurance policy(ies).
So while signing private money lending closing documents may seem like a quick and final process to your transaction it is actually neither. A large amount of effort goes into getting the loan transaction to the closing table. The loan transaction is complete when the security instrument (e.g. mortgage or trust deed) documents are recorded, and funds are disbursed. The loan funding and closing process varies based on time, state laws, and county processes. As a general rule, most transactions disburse funds within 3 days after loan documents are signed.