Escrow and closing for privately funded loans: a funder's guide

When a capital partner funds a private real estate loan, the money doesn't go to the borrower or the lender directly. It goes to a neutral settlement agent, usually a title company, escrow company or closing attorney, which holds the funds and releases them only when every condition in the closing instructions is met: the documents are signed, title will insure the lender's lien in first position, and the loan can be recorded.

For a funder, closing is the moment your money becomes a loan. This guide walks through how escrow and closing work on a privately funded loan, what you should receive and confirm before wiring, and what should happen after closing.

Who does what at closing

Party	Role at closing
Borrower	Signs the note, the mortgage or deed of trust, and other loan documents; brings any cash required
Originating lender	Prepares or approves the loan documents and closing instructions; the loan is often made in its name
Capital partner	Commits to fund, approves the closing instructions, and wires funds to the settlement agent
Settlement agent (title, escrow or attorney)	Holds funds, collects signatures, prepares the settlement statement, records documents, disburses money
Title insurer	Issues the lender's title policy insuring the lien's validity and priority. See title commitments

In some states closings are handled by an escrow company; in others, by an attorney. Practices vary by state, so the settlement agent and closing instructions should reflect local requirements.

Closing instructions: the funder's protection

Closing instructions tell the settlement agent exactly what must happen before funds can be released. For a capital partner, they are the single most important closing document. They typically cover:

• The parties and the loan: amount, rate, term, property and the lender of record.
• Documents to be signed and how: note, mortgage or deed of trust, guaranty, assignment where relevant.
• Title requirements: the policy amount, required endorsements, and which exceptions must be removed or are acceptable.
• Conditions to fund: insurance in place, payoff of existing liens, any holdbacks or reserves.
• Disbursement: who receives what, from the settlement statement.
• Recording: what is recorded and in what order, and who receives recorded copies.
• Where to return funds if closing doesn't happen by a deadline.

Read them before you wire, and make sure they name you, or your assignee, correctly as insured lender or loss payee where that applies.

Title and the closing protection letter

Before closing, the title company issues a title commitment listing what it will insure and what it excludes. Your counsel or the lender's should review the exceptions. At or after closing, the title insurer issues the lender's title policy.

Many funders also ask for a closing protection letter (CPL) from the title insurer. A CPL generally addresses certain losses caused by the title agent's handling of funds or documents, such as failing to follow written closing instructions. Its scope depends on the letter and the state. The American Land Title Association publishes standard forms and explains title products; see ALTA.

Wiring funds safely

Wire fraud targeting real estate closings is a well-known risk. Criminals send fake wiring instructions that look like they came from the title company or lender. The defense is procedural:

1. Never rely on wire instructions received by email alone. Treat any change to wiring instructions as a red flag.
2. Verify by phone using a number you already have, from an independent source such as the title company's official website or a verified directory, not from the email containing the instructions.
3. Confirm the account name matches the settlement agent.
4. Send a small test amount if your process allows, and confirm receipt before the full wire.
5. Confirm receipt of the full wire with the settlement agent by phone.

The FBI's Internet Crime Complaint Center publishes guidance on business email compromise and how to report it; see IC3.

The settlement statement

The settlement statement lists every dollar in and out of the transaction: the loan amount, the borrower's cash, payoffs, fees, reserves and holdbacks. Before funding, review it against your commitment:

• The loan amount matches what you agreed to fund.
• Holdbacks for rehab or construction are held back, not disbursed at closing. See construction draw management.
• Interest reserves, if any, are funded as agreed. See interest reserves.
• Existing liens are paid off so your lien will be first.
• Fees match the loan terms.

A worked example

Hypothetical example, for illustration only.

A capital partner commits to fund a $500,000 first-lien bridge loan, of which $75,000 is a rehab holdback. Three days before closing it receives the closing instructions, the title commitment and a draft settlement statement. It confirms:

• The instructions require a lender's title policy for $500,000 with first-lien priority, and a closing protection letter.
• The existing $210,000 mortgage is paid off at closing.
• $425,000 is disbursed at closing and $75,000 is held for draws.

It calls the title company at the number listed on its official website to verify wire instructions, sends the funds, and confirms receipt by phone. After closing it receives the recorded deed of trust, the final settlement statement and the title policy.

After closing: what you should receive

• Recorded mortgage or deed of trust, and any recorded assignment if the loan was assigned to you.
• The original note, endorsed to you or with an allonge, if you own the loan. See what a whole loan sale is.
• The final lender's title policy.
• The final settlement statement.
• Insurance certificates naming the lender as mortgagee or loss payee.
• Servicing set-up: who services the loan and how you'll receive payments and reports. See loan servicing.

Track these until they arrive. Recording and final title policies can take weeks.

Checklist before you wire

• Closing instructions reviewed and approved.
• Title commitment reviewed; required exceptions removed or accepted.
• Closing protection letter received, where available.
• Settlement statement matches the commitment, including holdbacks and reserves.
• Insurance in place.
• Wire instructions verified by phone using an independently sourced number.

Key takeaways

• Funds go to a neutral settlement agent and are released only when the closing instructions are satisfied.
• Closing instructions are the funder's main protection; read and approve them.
• Title insurance protects lien validity and priority; a closing protection letter can add protection around the agent's handling of funds.
• Verify wire instructions by phone using a number from an independent source, every time.

Frequently asked questions

What are closing instructions in a real estate loan?

They are written instructions to the title company, escrow agent or closing attorney setting out what must happen before funds are released: documents signed, title requirements met, liens paid off and disbursements made as listed on the settlement statement.

What is a closing protection letter?

It is a letter from a title insurer that generally addresses certain losses caused by the title agent's failure to follow written closing instructions or its mishandling of funds. Its exact coverage depends on the letter and the state.

How do I avoid wire fraud when funding a loan?

Never trust wire instructions sent by email alone. Verify them by calling the settlement agent at a phone number from an independent, trusted source, confirm the account name, and confirm receipt by phone after sending.

How Lender Capital fits

Lender Capital connects capital partners with private lenders whose whole, first-lien, business-purpose real estate loans they can fund. Capital partners see the full file for every loan before they commit, and they pay no fees. However a loan is sourced, the closing steps in this guide, especially verifying wire instructions by phone, still apply.

See how it works for capital partners, or request capital partner access.