10 Things Private Lenders Need to Know
If you are having a hard time securing financing through conventional means, then a private lender can end up saving the day for you. Whether you have poor credit but think you can clean up your record in a few years or need funding to rescue you from the throes of foreclosure, a private lender can come through to solve your financing issues. However, if you plan to get funds from a private lender, there are several things he/she will want to know.
1. Where is the property?
The reason why the lender wants to know this is that the property is the basis for granting the application or not. He/she already knows that you are a credit risk of sorts, and since the property is the collateral, the lender wants to know whether he/she can get a solid return on the property if foreclosure becomes necessary. Whether the property is in a big city or a suburb, location is going to be a vital piece of information.
2. What sort of property is it?
Private lenders are going to be a lot more likely to help you if you are looking for financing for an income-generating property. Is it a home with a tenant in it already? Is it a duplex that has two renters? Is it commercial space that already has fairly high occupancy? Positive answers to those questions will make your approval more likely.
3. What is the transaction type?
Are you getting the financing to build a project? Or is this a purchase of existing property? Are you trying to extract equity? Some transactions start yielding income sooner than others, and the more quickly you can get money coming in, the happier a private lender will be.
4. How are you using the funds?
If you are using the funds from the private lender to help you with a refinance, will it pay for the whole amount owed or just a part? If just a part, what is your plan for taking care of the rest of the amount? Having a plan in place makes your funding more likely.
5. How did you value the property?
An owner’s estimate is a lot less impressive than a property appraisal from a private party or a tax assessment from a government authority.
6. What is the amount of the loan and the LTV?
The higher the loan (and the less the LTV, or loan-to-value ratio), the more likely your own history is to come into play. This is because those numbers make it less likely for income alone to pay the loan back.
7. What is your financial strength?
Remember that we said the value of the property is the prime consideration. However, two equal loan applications, one with a poor credit risk and another with average credit, with only enough funding for one loan will result in a denial for the one with the poorer credit.
8. What are the unique factors of this deal?
How did you end up needing private funding? Your path to this point is sometimes a question that comes up.
9. How do you plan to repay this loan?
This is particularly crucial when you are trying to avoid foreclosure. You’re trying to replace one loan with another, and the lender has every right to ask how you plan to make this loan turn out differently.
10. What intangibles are in play?
Is your spouse receiving cancer treatments? Is your son just finishing college? What elements of your situation make it likely that you will do a better job with the next loan?
These elements are all important factors in determining whether or not you receive funding from a private lender.