How to Structure a Private Lending Deal: Documents, Terms, and Protection

Private lending is not complicated — but it does require proper documentation. The difference between a well-structured loan and a poorly structured one is the difference between a secured investment and an unsecured promise. This guide covers the essential components of every private lending transaction.

The Core Documents

• Promissory Note — the borrower's written promise to repay, specifying amount, interest rate, term, and payment schedule.
• Deed of Trust or Mortgage — pledges the property as collateral and is recorded in the public record.
• Personal Guarantee — optional but recommended for additional recourse beyond the property.
• Loan Agreement — outlines all terms, conditions, default provisions, and remedies.
• Title Insurance — protects the lender against title defects and undisclosed liens.

Key Loan Terms to Negotiate

• Interest rate — typically 8–14% for private loans, depending on risk and term.
• Loan-to-value ratio — most private lenders cap at 65–75% of current property value.
• Term — short-term (6–24 months) for bridge or construction; longer for stabilized assets.
• Points — origination fees of 1–3% are standard on shorter-term loans.
• Prepayment — decide whether you want a prepayment penalty to protect your yield.

First Lien vs. Second Lien

First lien position means you are the senior creditor — in a foreclosure, you are paid before any other lienholders. Second lien position carries more risk because the first lien must be satisfied before you receive anything. New private lenders should focus exclusively on first lien positions until they have significant experience.

What Happens If the Borrower Defaults?

Default provisions should be clearly defined in your loan documents. Common remedies include acceleration of the full balance, late fees, and initiation of foreclosure proceedings. In non-judicial foreclosure states, the process can be completed in 60–120 days; in judicial states, it may take 12–24 months. Know your state's process before you lend.

Working with a Real Estate Attorney

Every private lending transaction should be reviewed by a licensed real estate attorney in the state where the property is located. Template documents from the internet are not a substitute for state-specific legal review. The cost of proper legal documentation is a small fraction of the capital at risk.

The best private lenders are not the most aggressive — they are the most disciplined. Structure every deal as if you will need to enforce it.