Is Private Real Estate Lending Legal? How the Rules Actually Work

Yes, it's legal. Hard money lending runs under a different set of rules than a home mortgage, not outside the rules. Because these loans fund investment property for business purposes, many consumer mortgage protections don't apply, but state law, federal lending law and the loan contract still do.

Business purpose is the dividing line

Much of federal mortgage regulation was written to protect people buying or refinancing the home they live in. Rules on certain disclosures and on proving a borrower can repay a home loan are aimed at those consumer loans.

A loan made to buy, renovate or hold investment property is generally treated as business-purpose credit. That's why private lenders typically lend to an LLC or other entity, and why they'll ask you to confirm in writing that you won't live in the property.

RSC Private Lending makes business-purpose loans only. It doesn't lend for personal, family or household use, and it doesn't make owner-occupied loans.

What still applies

Business-purpose doesn't mean anything goes.

• State law. Licensing rules vary a lot. Some states require a license even for business-purpose lenders. Others exempt them.
• Usury limits. Many states cap interest rates, though the caps and the exemptions for business or larger loans differ by state.
• Fair lending. Federal law bars discrimination in credit decisions, including on business loans.
• Identity and sanctions checks. Lenders verify who they're lending to and screen against government watch lists.
• Foreclosure law. If a loan defaults, the state's foreclosure process governs what happens next.
• The contract. Your note, guaranty and deed of trust or mortgage spell out everyone's rights.

How to vet a lender

You don't need a law degree. A few questions go a long way:

• Will you put all terms, fees and conditions in writing before I commit?
• Who services the loan, and how are draws and payoffs handled?
• What's your process if a project runs late?
• Can you share references from borrowers who've closed with you?

Watch out for anyone asking for large upfront fees before issuing terms, refusing to put things in writing, or pushing you to close on a home you'll live in using a business-purpose loan.

A practical check

Example: A lender quotes you by phone and asks for a $5,000 "commitment fee" by wire before sending anything in writing. That's a red flag. A legitimate lender will typically send a written term sheet showing the rate, points, fees and conditions before asking you to commit funds beyond normal third-party costs like a valuation.

What this means for you

Private lending is a regulated, contract-based business. Know which rules apply, get every term in writing and ask direct questions. A good lender will welcome them.

Want every term in writing before you commit? Send RSC Private Lending your scenario for a term sheet in 24 hours. Subject to underwriting.