Becoming a private mortgage lender doesn't require any special licenses. However, the business is regulated from state to state, and even some counties have special regulations governing the business. Private mortgage lenders are also called "hard money lenders" because they use their own money to finance mortgages. These lenders also often charge higher rates of interest and have shorter loan terms. In general, it's best to have substantial experience in the real estate business, and even some experience in commercial banking before starting such a business. The risky nature of private mortgage lending makes it dangerous for amateurs.
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Start a corporation or a limited liability corporation (LLC) in the state in which you want to start your private mortgage business. This usually involves filing some documents with the office of the Secretary of State of the relevant municipality. You may wish to hire a lawyer to assist you in this process.
Consult with a lawyer and an accountant about the relevant regulations governing private mortgage lending in your area. Certain states may place a maximum interest rate on your loans. Others will restrict the language that you're permitted to use in your advertising. Others will demand that you follow certain borrower evaluation processes before extending loans.
Develop your methodology for evaluating borrowers. Individuals with commercial lending experience can assist you with this procedure. It's often wise to run credit reports on individuals and business credit reports on companies. You can subscribe to credit reporting services from the three major individual credit bureaus (Transunion, Equifax and Experian), or the business credit reporting services from Dun & Bradstreet, Experian and Equifax. Entities with a poor credit history are bad candidates for hard money loans. The standards for hard money loans ought to be more stringent than those that come from banks, because of the higher risks associated with it. Despite this, hard money loans are often priced based on the value of the land rather than the creditworthiness of the borrower. Interest rates can reach the high teens or more to compensate for the risk.
Begin marketing your business, clearly identifying it as a hard money lending operation. In most cases, real estate investors are the primary borrowers. For whatever reason, these borrowers are looking for mortgage solutions outside the regular banking system. They may only need a short-term mortgage, and therefore, are willing to pay higher rates of interest in return for a simplified borrowing program. Nonetheless, it's wise to perform comprehensive evaluations on all borrowers--both individual and corporate--before extending any credit.
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