Private Lending Mechanics and Legal Structure
Private lending (also called hard money lending or private money lending) is the act of lending capital secured by real estate, outside the traditional banking system. Private lenders are individuals or entities — often experienced real estate investors themselves — who provide short-term capital to borrowers (typically fix-and-flip investors or developers) who need speed and flexibility that banks cannot provide. A private loan is documented by two primary legal instruments: the Promissory Note and the Deed of Trust (or Mortgage in non-deed-of-trust states). The Promissory Note is the borrower's written promise to repay — it specifies the principal amount, interest rate, payment schedule (most private loans are interest-only during the term), maturity date (typically 6–24 months), prepayment terms, and default consequences. The Deed of Trust (used in approximately 30 states) or Mortgage (approximately 20 states) is the security instrument that creates a lien on the real property — it gives the lender the legal right to foreclose and take possession of the property if the borrower defaults. Deeds of trust typically allow non-judicial foreclosure (faster, through a trustee process); mortgages require judicial foreclosure (court-supervised, slower and more expensive). Title insurance with a lender's policy protects the private lender against undisclosed prior liens, title defects, or competing ownership claims. Without a lender's title policy, the private lender is exposed to losing their lien priority to a previously undisclosed encumbrance. An escrow or title company handles the loan closing, ensuring all documents are properly recorded with the county recorder's office — recording establishes the lien and its priority date.