I need help, first time lending and need help making sure I am protecting myself. Situation, borrower is buying house for cash, will close on Friday. Wants to use the house as collateral for a loan from me, money is for another project. How do I make sure 1) that he actually owns the property, 2) that I am 1st lien holder 3) that I am listed as a payee on his insurance 4) any other advice? What form should I use for the contract?
We are in California, house is worth 900k as is loan amount is 300k so being 1st lien holder should be a great position to be in. Also this is a 6 month loan, what do I do if he needs more time? Bump the rate? Add points? Foreclose? Check on project and let him keep going at same rate?
Your title company should be able to tell you if “he” owns the property and what position you would be in. As a lender you should probably get a lender’s policy, and part of the lender’s policy will be a commitment for title. This shows all the liens, judgements etc. Your contract should state he has to list you as an additional insured on the property on his house insurance policy. Get proof before you close the loan and make sure you have remedy if he cancels the insurance. I don’t know California law, but I am assuming a note and trust deed are the forms to use. Your title company will probably create these documents for you.
You can have any penalty like 1% if the note becomes past due by X days then the interest rate goes up. Really anything both parties agree on should work.
It is important to collect pay stubs, bank account statements, W-2s, tax returns for the past two years, statements from current loans and credit lines, and names and addresses of your landlords for the past two years. Have all of that paperwork ready for the lender.
It may seem like a lot, but don’t be surprised if your lender wants a lot of documentation.
Would be a good idea to have an attorney help handle to make sure these items are dealt with correctly. Not a transaction you want to find out later you missed something on.