Most people picture private lending as a handshake and a check. That picture is exactly what gets lenders hurt.
A well-made private loan is a stack of documents, each one doing a specific job. Pull any one of them out and the lender is exposed somewhere. I’m a borrower, and I want lenders to understand this stack so well that they can spot a missing piece in thirty seconds.
Here’s how private money lending works, piece by piece.
The promissory note: the promise
The promissory note is the borrower’s written promise to repay the loan. It’s the contract. A properly drafted note generally spells out:
- Who is lending and who is borrowing
- The amount of the loan and how it’s disbursed
- How and when payments are made, and when the loan comes due
- What counts as a default
- What the lender can do if the borrower defaults
- Whether anyone is personally liable beyond the property
- Late charges, prepayment terms and other provisions the parties agree on
I’m not going to tell you what those terms should be. That’s between a lender, a borrower and their attorneys. What I will tell you is that the note should be drafted by a real estate attorney, and the lender should have their own attorney review it.
The mortgage: the security
The note is a promise. The mortgage is what makes the property stand behind that promise.
In South Carolina, the security instrument is a mortgage. It’s signed by the property owner and recorded with the county’s register of deeds or similar office. Recording is critical — it puts the public on notice that the lender has a claim on that property. An unrecorded mortgage is a mortgage that a later buyer or creditor may not have to respect.
When the loan is paid off, the lender signs a satisfaction, and that gets recorded too, clearing the lien.
Lien position: where you stand in line
If there’s more than one lien on a property, they generally line up in the order they were recorded. First lien position means a lender is first in that line among voluntary liens like mortgages. In a sale or foreclosure, first position generally gets paid before anyone behind it.
A few cautions a careful lender keeps in mind:
- Some obligations, such as property taxes, can take priority regardless of when a mortgage was recorded.
- Being in second position behind another lender is a very different risk.
- You shouldn’t assume your position. Title work and title insurance confirm it.
Lender’s title insurance: protection against the past
Before closing, the closing attorney searches the title — the chain of ownership and recorded claims against the property. Lender’s title insurance protects the lender if a covered title defect shows up later: an old lien nobody caught, a forged deed in the chain, a recording error.
It’s a one-time cost at closing. A careful lender treats it as non-negotiable.
Hazard insurance naming the lender: protection against the future
Title insurance covers problems from the past. Hazard insurance covers damage going forward — fire, storms, certain other losses.
The key detail: the lender should be named on the policy as mortgagee. That way, if there’s a claim, the insurance company is obligated to protect the lender’s interest, not just send a check to the borrower. On a renovation, the right kind of policy matters too, because a vacant house under construction is a different risk than an occupied one. Ask for the declarations page before closing.
The closing attorney: the referee
South Carolina closings are supervised by attorneys. For a private loan, the closing attorney typically:
- Runs the title search and issues title insurance through an underwriter
- Prepares or coordinates the closing documents
- Receives the lender’s funds and disburses them properly
- Records the deed and the mortgage
- Confirms insurance is in place
A careful lender never wires money directly to a borrower. Funds go to the closing attorney’s trust account, and the attorney disburses them at closing. If you want to understand why investors care so much about their choice of closing attorney, read real estate closing attorneys in South Carolina.
Draws on renovation loans
When a loan funds a renovation, the lender often doesn’t release all the renovation money at closing. Instead, funds are held back and released in draws as work is completed. Before each draw, someone verifies the work — photos, an inspection, or a site visit. Lien waivers from contractors help confirm people got paid.
This protects the lender from paying for work that hasn’t happened. Borrowers who’ve run a disciplined renovation will recognize the process. If you want to see how a borrower should manage contractors and draws, read how to manage contractors on a flip.
Servicing: who keeps track
Servicing is the ongoing administration of the loan — tracking payments, sending statements, handling payoff requests, confirming insurance and taxes stay current, and documenting everything. Some private lenders service their own loans. Others use a third-party servicer so there’s a neutral record.
Either way, someone needs to keep clean records. If a dispute ever happens, the paper trail is what matters.
Payoff: how the loan ends
Most private loans on investment property end when the borrower sells or refinances. At that closing, the closing attorney requests a payoff statement from the lender, pays the lender from the proceeds, and records the satisfaction of mortgage. Then the loan is done.
If the borrower can’t sell or refinance by the due date, the note governs what happens next — an extension, a default, or something else the parties negotiate. That’s why the note matters so much, and why you should read about the risks of private money lending, including how long foreclosure takes in South Carolina.
Putting it together
Here’s the stack, start to finish:
| Piece | What it does |
|---|---|
| Promissory note | The borrower’s promise to repay and the rules of the loan |
| Recorded mortgage | Ties the promise to the property and puts the world on notice |
| Title search and lender’s title insurance | Confirms lien position and protects against past title defects |
| Hazard insurance naming the lender | Protects the collateral against future physical loss |
| Closing attorney | Handles funds, documents and recording |
| Draws | Releases renovation money only as work is done |
| Servicing | Keeps the record straight for the life of the loan |
If a borrower can’t explain each of those pieces, or resists any of them, that tells you something. My full list of borrower questions lives on the vetting checklist.
Your next step
Read this page twice. Then take the list to your own attorney and ask what they’d add for your situation. For the bigger picture, go back to private money lending. And if you’d like a personal conversation about how I work with private lenders, you can join the inquiry list and I’ll reach out myself.
Questions people ask
What is a private mortgage note?
A private mortgage note is a promissory note between an individual lender and a borrower, secured by a mortgage on real estate. The note is the promise to repay. The mortgage is what ties that promise to the property.
What does first lien position mean?
First lien position means the lender’s mortgage is recorded ahead of other voluntary liens on the property, so it generally gets paid first from a sale or foreclosure. Certain items like property taxes can still take priority. Lender’s title insurance and the closing attorney’s title work confirm where a lien actually sits.
Does South Carolina use mortgages or deeds of trust?
South Carolina uses mortgages as the security instrument for real estate loans, and the state forecloses judicially, through the courts. Ask your attorney how that affects your specific loan.