Investing in real estate requires trust. Trust in your process and trust with others. Team work makes the dream work, after all. But before building trust you need to know the people that will be part of your bigger “team.” One of these team members is your private money lender. To help facilitate that relationship, we’ve provided questions to ask your private money lender. This guide will allow you to review lenders and fund you deal in confidence.
1. How Experienced is the Lender in Private Money Lending?
As far as questions to ask a private money lender, this one is obvious. How long a company or individual has been in the private money lending business matters. Just like you wouldn’t turn your car over to a mechanic with no work history, the same discretion applies to who’s lending you money. How long have they been in business and how is their reputation? Ask around.
2. Is the Lender Licensed?
Most states require licensing of private money lenders—but not all.
In 2008, the Fed passed “The Secure and Fair Enforcement for Mortgage Licensing Act.” This is required of lenders if they meet certain criteria. That criteria is 1) the lender originates the loan; and 2) the loan is secured with one to four family (4-plex) residences in real estate. Known today as The SAFE Act, this regulation requires these lenders to adhere to national standards for lending. It requires state-licensed lenders to take classes, pass a licensing exam, and complete background checks.
Many individual lenders don’t fall into these collateral buckets. The might use as collateral such as commercial property or large residential buildings that exceed the 4-family residence, like an apartment complex.
3. Do They Lend Direct or are They a Broker for Other Lenders?
Some companies and individuals might represent themselves as direct lenders, but in truth are brokers. As a broker, they represent a number of lending companies. So what is their motivation? Getting you the best rate or getting themselves the best commission? Most brokerages are honest, but the financial services industry is fraught with shuck artists and shysters. For you as the borrower, knowing who you are dealing with is essential.
4. Do They Have References?
Check their Google reviews. Do you find any red flags?
One of the questions to ask a private money lender is if they have references you can talk to directly. Always verify when it comes to private money lenders.
5. What Interest Rates do They Charge? How Many Points?
Many times, this is the first thing that brings borrowers in. Lenders use their interest rates to bring customers to the door. Your actual rate might differ, depending on your situation and lending history. But understanding their interest rates gives you a baseline to run some numbers.
Calculate your total interest rate by making sure you know how many points they charge, and how points work in lending.
These two critical pieces of information will give you an idea of what you will pay in total interest and how those numbers affect YOUR bottom line.
6. What Other Fees Do They Charge for a Loan
Licensing fees, processing fees, surcharges, whatever! If you’re a half-intelligent adult that has lived on this earth, you understand the drill. Financial companies live and die off of their fees. Fees are a profit driver for U.S. banks for example.
These charges all go to your bottom line. Ask the lender for their rate sheet and a list of their charges.
These could be anything from application fees to loan servicing fees.
7. How Do They Calculate Loan to Value (LTV)?
The Loan to Value (LTV) ratio is used by some private money lenders to ensure they are properly leveraged in the deal as well as reassured that they’ll get their money back in the advent of a foreclosure.
They can do this because they hold the borrowers asset (property) as collateral.
One typical way of calculating LTV looks like this: Size of Loan ÷ Appraised Value = LTV
Typical loan amounts for private money lenders is between 65% to 75% of the assets value.
One thing to understand is what numbers they use to calculate LTV. Do they use the After Repair Value or purchase price of the home for their valuations?
8. Is There a Penalty for Paying the Loan Off Early?
Lenders calculate their own numbers. Their aim is to keep their money working for them. They calculate the loan terms and the amount of interest they will collect over that term.
In some cases, they want to make sure they receive their due in interest, so they might institute a prepayment penalty.
Understand what your lender’s policies are regarding early payment.
9. How Much Time Does it Take to Fund the Loan?
Real estate investors know that time is of the essence. That “great deal” you put under contract will only stay under contract if you can deliver the funds to the seller.
Time to funding can be a deal breaker.
If it’s too long, the seller might find a new buyer.
Ask what their average delivery time is for funding and if those numbers are different depending on the size or type of loan.
10. How Long are the Loan Terms?
Many private money loans are for shorter terms. A lender might fund fix and flips loans that can be anywhere from 6 to 9 months.
Some lenders will have longer terms depending on the type of loan you are looking to get, such as commercial or rental loans.
11. Is the Loan Based on ARV?
One factor that can influence a lender’s decision is the After Repair Value (ARV) of the property you are looking to fund.
There are other factors taken into account, such as your borrowing history, credit score, experience level, and more.
Some of those things might mean more or less to a lender.
For some, the biggest factor is the ARV. A good ARV is insurance for the lender that they will be able to get their money back.
The ARV is also important when calculating your max allowable offer for a property.
12. How Do They Calculate After Repair Value (ARV) on a Property?
Several factors can come into play when determining ARV. The type of market, such as low margin housing can affect how they calculate ARV. Another example is whether closing fees are included or not in their ARV calculations.
Understand exactly how the lender calculates this crucial number. And make sure it aligns with your profit goals for your investment.
13. What are the Payment Terms?
Some borrowers might wonder if they can make all the payments at the end. Many institutional lenders will typically require a monthly payment based on the loan amount and the length of the loan. If you borrow $100K for a 6 month term, for example, you’re payment will consist of mostly interest.
Other individual lenders might be flexible with their payment terms. You might make monthly payments and then a balloon payment at the end. Or the lender might allow you to pay off the loan at the end of the term. This might work in the case of a fix and flip when the borrower sells the property.
14. Do They Require a Minimum Account Balance or Cash Reserves?
“How much cash do I need to make this deal happen?” is a question investors ask themselves before any real estate transaction.
Some lenders might have a very low requirement for cash reserves.
Knowing exactly what you need to secure a loan we help you prepare for approval.
15. How Much of a Down Payment Do I Need?
Lenders want to see some skin in the game, especially if you’re a new customer.
Most real estate investors might have cash on hand for a deal, but not enough. For many, one of the challenges they face is tying up their money in assets. This leaves the investor with less cash on hand to fund new deals.
This is where a private money lender comes in.
16. Is There a Penalty If I Exceed the Loan Term?
Other lenders might take a harder line and demand the remaining balance or worse—foreclose. Know which type of institution or individual you’re dealing with.
17. What Types of Loans Do They Offer?
For every type of real estate project, there’s a loan type associated with that activity.
There are many types of loans, including:
- Bridge loans
- Fix and flip loans
- Long term rental
- New construction
- Commercial
If you need a commercial loan but the lender doesn’t do commercial, it is best to ask before filing out a loan application.
18. How Do They Disburse Funds for Renovations?
Property owners and investors face challenges that traditional lending borrowers might not face. Time is always an factor especially in the case of fix and flip opportunities.
After finding a great deal, an investor needs to move quickly to fund the investment as well as make sure their timing is right on their renovation.
Will your loan cover both the purchase price and cost of renovations? Know this before going in.
The speed at which your entire investment process moves is a determining factor in profitability.
19. Is there a Minimum FICO score?
Credit checks are important for lenders. But for many, especially in the private money lending space, it’s only a piece of the puzzle.
For many lenders, the deal itself might be the real deciding factor.
Don’t view bad credit as the be-all and end-all of securing a loan. But understand the criteria that the lender is looking for when funding these real estate deals. Credit history is just one of those.
20. What States Do They Lend?
Some states can make it hard for private money lenders. Individual states might have more stringent requirements for private money loans compared to National requirements.
Most lenders have a loan lending map. “Do they lend direct in those areas or do they have partners they use to fund their loans?” is another one of the questions to ask a private money lender.
Understand some of the connections and lending power your lender has in the state you want to fund your purchase.
21. Is There an Application Fee?
For some lenders, a loan application fee is a sign of commitment. They know if an applicant pays an app fee that borrower is serious about getting a loan. For smaller lenders, a loan application fee might be unnecessary. They work selectively with a handful of clients and have working relationships with their borrowers.
Speak with a Private Money Loan Specialist Today
Get answers to any of the “Questions to Ask a Private Money Lender” today. A Cogo loan analysts will provide you the information you need to complete your next investment opportunity. Answers are free and the people are friendly. Call 800-473-6054 for your consultation today.
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