A private loan agreed over coffee and documented on a single page is the arrangement most likely to produce a dispute. Not because either party intended one, but because nobody wrote down what happens when things do not go as planned.
The documents that make a private loan work are standard, and each one exists because something went wrong for someone else first.
Background only, not legal advice. Loan documentation, recording requirements and usury limits are governed at state level and differ substantially. Have an attorney prepare or review the documents rather than working from a template.
The Documents That Have to Exist
Whatever source of capital you use from the available options, the documentation is what determines your actual exposure.
The promissory note. The instrument creating the obligation. It states the principal, the interest rate, the term, the payment schedule, and what constitutes default and what follows it. This is the document that makes the debt enforceable.
The security instrument. A mortgage or a deed of trust, depending on your state, granting the lender an interest in the property. This is what makes the loan secured, and it has to be recorded publicly to establish priority against other claims.
The distinction between these two matters and is often confused. The note creates the debt. The security instrument attaches it to the property. A note without recorded security is an unsecured personal loan whatever anyone believed.
Lender's title insurance. Protecting the lender's position against defects in title.
Hazard insurance with the lender named. So their security survives a fire.
A personal guarantee, where applicable. Making you personally liable in addition to the property. Frequently required and always worth understanding before signing, per private money lending.
The Terms Worth Negotiating Carefully
The term, and what happens at maturity. The most consequential number in the document. Negotiate longer than your optimistic timeline, because the deals that hurt are the ones where the exit took twice as long as planned.
Extension rights. Whether the note can be extended, who has to be told, and what the extra time costs. A right agreed at the start is inexpensive. One requested at maturity is negotiated from a poor position.
How interest accrues. Monthly payments preserve the lender's cash flow and drain yours during a renovation with no income. Accrued interest paid at the end preserves yours and costs more in total.
Whether interest runs on the full amount or on drawn funds. On a renovation loan this is a large difference, and the answer is usually unfavorable by default.
Prepayment. Whether there is a penalty and whether there is a minimum interest period, which some lenders impose so a fast exit still pays a floor.
The default rate. What the interest rate becomes if you miss. This can be substantially higher and it is rarely discussed at signing.
Draw mechanics on renovation funds. How draws are requested, what inspection is required, how long they take, and what each one costs. A lender with a slow draw process can stall a project regardless of the rate.
The Personal Guarantee
The single term that changes what a bad deal means, and it deserves its own consideration.
Without one, a lender's recourse is generally limited to the property. If the deal fails, you lose the property and your investment in it.
With one, the lender can pursue you personally for any shortfall. A deal that goes badly enough can reach assets that had nothing to do with it.
Many lenders require it and will not move. What is negotiable is sometimes the scope: whether it is full or limited, whether it burns off after certain conditions, and whether it applies to a shortfall or to the whole obligation.
The point is not to refuse it. It is to know whether you signed one, because a meaningful number of investors do not, and that determines how much risk the deal actually carries.
Priority, and Why Recording Matters
The mechanical point that decides who gets paid.
Security interests generally rank by when they were recorded. A first position lender is paid before a second position lender from the proceeds of a sale or foreclosure.
Which means an unrecorded interest, or one recorded late, may sit behind claims that arrived afterward. A private lender who accepted a note and did not record anything is in a much worse position than they believe.
For an investor this cuts both ways. It is the reason your lender will insist on recording, and that is the reason to check what already sits against a property before you borrow against it, covered in title problems that kill wholesale deals.
Second Position and Subordination
Where a deal has more than one lender, the arrangement between them matters as much as the terms of either loan.
A second position lender is paid after the first from any proceeds, which makes their position substantially riskier and explains why the pricing is higher, set out in gap funding.
Two documents commonly appear. A subordination agreement, where one lender agrees to rank behind another, sometimes required when refinancing. And an intercreditor agreement setting out how the lenders deal with each other, including who may act on a default.
The practical point for a borrower: your first position lender may prohibit additional secured borrowing entirely, and taking a second loan in breach of that can itself be a default on the first.
Read what the first lender's documents say about additional encumbrances before arranging anything else. Investors discover this restriction after signing the second note, which is a genuinely difficult position to unwind.
Usury, Which Investors Never Think About
States impose limits on interest rates, and the rules differ substantially.
Exemptions commonly exist for business-purpose loans, for loans above certain amounts, or for licensed lenders, which is why hard money operates at rates that would be impermissible in a consumer context.
The exposure sits with the lender rather than the borrower, and penalties can include forfeiting interest entirely or worse.
Where this matters to you: a private lender who is an individual, lending at a high rate, may be creating a problem for themselves without knowing. Pointing it out is both decent and self-interested, since a loan that turns out to be unenforceable as written is a mess for both parties.
Using an Attorney Properly
The cost objection, answered.
Having an attorney prepare a note and security instrument for a private loan is a modest one-time expense, and the documents are reusable as a template for future loans with the same lender or in the same state.
What you are buying is a document that reflects your state's requirements, records properly, and covers the situations neither party thought about. A generic form from the internet does none of those reliably.
The one-time cost is small against a single dispute, and against the possibility that a defect in the security instrument means the lender is unsecured, worked through in compliance for real estate investors.
Documenting a Deal That Changes
Projects change, and the paperwork usually does not follow, which is where disputes begin.
An additional advance, an extended term, a changed payment schedule or a revised scope should each be documented in writing and, where the change affects the secured obligation, may need to be recorded.
The common failure is a verbal agreement to extend by ninety days, made in good faith, with nothing signed. Both parties remember it differently and neither is lying.
A short written amendment, signed by both, referencing the original note, resolves it. That is an email exchange in the simplest case and an attorney-prepared amendment where the security is affected.
The habit worth building: any change to the money, the timing or the security gets written down the same week, not at the end of the project when someone is trying to reconstruct what was agreed, per keeping records.
What to Do Before Signing Anything
Read the maturity date and work out honestly whether your timeline fits inside it with margin.
Find the default rate and the extension terms, since those are the provisions that operate exactly when you are least able to negotiate.
Establish whether you personally guaranteed it.
Confirm the security is being recorded and in what position.
Check the draw mechanics if renovation money is involved, including how long a draw actually takes.
Those five checks take twenty minutes and they cover the terms that determine whether a deal that goes wrong is survivable, which is a better use of attention than negotiating a quarter point on the rate.