sign here, here, & here
To close on a loan for your real estate investment project, private lenders will present a number of documents for your approval. The loan documents presented to you will be determined by your lender as well as the rules of the particular state. Below are the standard documents we require of our borrowers:
1. Promissory Note: Defined as a debt instrument that contains a written promise by one party (the borrower or maker) to pay another party (the lender/payee) a defined sum of money on specified future date. The promissory note will include the details of the loan agreement including:
Principal Amount Interest Rate Payment Terms Maturity Date
Default Interest Rate Collateral Securing Loan Default Provisions Borrower / Maker
2. Deed of Trust: In non-judicial foreclosure states (like Texas), a deed of trust is the security instrument that is signed by the property owner (borrower) that grants the lender a legal interest on the collateral property (referred to as a lien). In case of loan default, the deed of trust provides the lender with the right to foreclose. Since a deed of trust is recorded with the county, they are public record and in most counties these documents can be accessed online via the county’s website.
In judicial foreclosure states, a mortgage is used (instead of a deed of trust) to create a lien on a property.
3. Guaranty of Promissory Note: This is a personal guaranty provided by the borrower that obligates the borrower to payment and performance. This guaranty provides an additional layer of protection to the lender beyond the deed of trust if there is a default.
4. Repairs Reimbursement Agreement: This agreement identifies the specific repairs and improvements that the borrower will be making on the property and the related reimbursement draw schedule.
5. Designation of Commercial Loan: Since commercial loans fall under different state laws (and different licensing) than consumer loans, private lenders often require the borrower to sign an affidavit stating that the loan is intended for commercial purposes for purchasing investment property.
6. Non-Owner Occupancy Certificate: The borrower agrees to use the collateral property for investment purposes only and will not occupy, reside in, or use in a personal manner. This certificate along with the designation of commercial loan are both designed to prevent any misunderstanding about the purpose of the loan and use of the collateral.
7. In addition to these documents, a private lender will usually require a lender title policy as well as property hazard insurance (builder’s risk policy). We will cover each of these in a future article.
At closing, the borrower will be presented with the lender documents above for signature. Yes, they are written in typical “legalese” and hopefully, the descriptions above will help you better understand the purpose of each.