What a private lender holds, and how a note pays.
A private loan on a house uses the same documents as a bank mortgage. Here's what each one does, what an amortized note pays over its life, and the questions to ask any borrower before you lend, including us.
What the lender holds
A private lender does the bank's job on one house. The lender's money goes to the purchase at closing, and the lender comes away with paper that gives them a claim on that house.
The promissory note
The borrower's written promise to repay. It sets the amount, the rate, the payment schedule, and what happens if payments stop.
The mortgage
The lien, recorded against the house at the county. It gives the lender a legal claim on the property if the note isn't paid. (Some states use a deed of trust for the same job.)
A lender's title policy
Insurance against an old lien or an ownership problem that turns up after closing. The title company issues it when it records the mortgage.
The lender on the insurance
The homeowner's policy lists the lender as mortgagee, so a check for fire or storm damage can't be cashed without them.
The money never passes through the borrower's hands. It goes to the title company, which pays the seller, records the mortgage, and sends the lender the recorded documents.
Who gets paid first
When a house is sold or foreclosed, the liens get paid in the order they were recorded. The first-position lender is paid in full before anyone in second position sees a dollar.
A real one: Silsby Road, University Heights. We bought the house in January 2022 for $130,000 by taking over the seller's mortgage. A private lender later funded a $25,000 note in second position, behind that mortgage. When we sold the house in December 2024 for $235,000, the closing paid off the first mortgage, then the note.
That sale had room for both. If a house sells for less than the first mortgage, a second-position lender can get nothing. If you're going to lend, understand why first position matters, and don't accept second position from anyone without knowing exactly what that means.
How an amortized note pays down
Amortized notes pay the lender principal and interest monthly. Here's what that looks like on a hypothetical $50,000 note at 9% over four years.
- Monthly payment$1,244.25
- First month$375.00 interest, $869.25 principal
- Interest over four years$9,724.10
- Balance after the last payment$0
The balance, year by year
Each payment shrinks the balance, so the amount the lender has at stake falls every month. An interest-only note with a balloon keeps the full $50,000 outstanding until the last day.
Lending from an IRA
An IRA can be the lender. A self-directed IRA custodian holds the note in the account's name, the payments go back into the IRA, and the interest grows tax-deferred in a traditional IRA or tax-free in a Roth.
The Samuel Avenue note was funded this way. Custodians charge account fees, and the IRA can't lend to you or to the family members the IRS treats as disqualified persons, so it has to be a loan to someone else.
Questions to ask any borrower, including us
A borrower who answers these with documents is worth a second conversation.
- What position will my lien be in?And will I get a copy of the recorded mortgage once the county records it?
- Which title company is closing?Will I get a lender's title policy, and can I talk to the title company directly?
- Will I be named on the insurance?Ask to see the policy with you listed as mortgagee.
- What are you paying for the house, and what is it worth?Ask for the purchase contract, and compare the note to both numbers.
- Who pays the note if the house is empty?Ask how the borrower keeps paying when no rent is coming in.
- Who pays the property taxes, and how will I know?Unpaid taxes can jump ahead of a mortgage.
- Can I see houses you've already done, with addresses?Ours are on the Deals page.
- What records will I get each year?A payment history and the interest paid, for your taxes.
If payments stop
Like every investment, a private note carries risk, and it helps to know the mechanics before you ever need them. If a borrower stops paying, the lender's remedy is foreclosure. Ohio forecloses through the courts, so it takes months and legal fees come first, and then the house is sold to pay the note back.
The money is also committed for the term. There's no exchange to sell a private note on, and no FDIC insurance behind it. That's why the purchase price, the lien position, and the questions above carry so much weight.
Common questions
Is lending on a note the same as owning the house?
No. The lender owns a loan, and the borrower owns the house. Tenants, repairs, and the property tax bill belong to the owner. The lender's claim on the house comes from the recorded mortgage.
What happens to the note if the borrower sells the house?
The note gets paid off at the closing, out of the sale, before the seller receives anything. Silsby Road above is a real example.
What's the difference between a note and a mortgage?
The note is the promise to repay. The mortgage is the lien that puts the house behind that promise. A lender needs both, and the mortgage needs to be recorded at the county.
Where can I read more?
Start with what a private mortgage note is, then how seller financing works.
Want to walk through it with Dan?
If you want to learn what it takes to be a private lender and figure out whether it fits your situation, apply for a Private Lender Fit Call — link below. It's a conversation, not a pitch.