We already know who the major players are in a private money loan transaction, but it’s also important to know what role they play in the process of funding a loan and what they’re responsible for. In most cases, a company like MMG Capital will be watching over this process on your behalf, so many of the functions will be invisible to you. However, by understanding the pieces that make up the puzzle, you’ll become a better investor and prepare yourself to ask the right questions.

The Due Diligence Process

The period between the time that a borrower comes to a private lender with a loan request and the day that the loan is actually closed and funded is what we call the due diligence period. This is the time when all of the stated facts surrounding the borrower, the collateral and their situation are verified and checked.

One of the most important functions performed during the due diligence process falls on the title company. The title company gathers information about the borrower and the borrower’s asset(s) involved in the loan transaction. In the case of a purchase transaction, the property being purchased is included. A number of searches are run on the borrower to determine whether or not there are any outstanding liens or judgments against the borrower and/or any easements or encumbrances against any property involved in the transaction. Once the title company gathers its information, it prepares a preliminary title report which serves as an offer to provide title insurance on the subject property. This is what ensures the lender that the borrower has the legal right to grant them a lien on the property as security for a loan and that there aren’t any other liens that will take priority to it (unless the lender agrees to them).

While the title company is fulfilling their role, the lender is responsible for what’s called “underwriting” – it’s the process of fact checking, verifying, analyzing and processing the information that the borrower is providing in order to qualify for a loan. In some cases, a good underwriter needs years of experience to be able to accurately assess, value and approve financial information.

Settlement and Closing

After the due diligence period, a formal closing or settlement will be set. You will often refer to this time period referred to as “the closing table” because this is the short time period when the lender and the borrower formally agree to the terms that they prearranged when they negotiated the loan. Closing documents are signed by the borrower and given either to the title company or a third party escrow company responsible for ensuring that they’re properly recorded. The escrow or settlement agent may also act as a transaction intermediary,  handling loan proceeds from the lender and disbursing them to the appropriate parties, including the borrower.

The time that it takes to get from loan origination to actual loan closing can take anywhere from 1 week to several months depending on the size and complexity of a loan transaction. On average, it will take 2 to 3 weeks since there is always plenty of work to be done by the lender and other third parties responsible for different pieces of the loan funding process.