For those who are new to the lending industry, hard money and private capital loans are essentially the same thing. Typically, these are lenders who fund loans with their own money (or a fund of money that they control), so they have the freedom to approve loans based on their own lending and investment strategy rather than having their hands tied by federal regulations. The “hard” in hard money refers to the fact that these lenders use an asset-based underwriting that focuses largely on the value of the property rather than a borrower’s credit-worthiness and offers lower loan-to-value (LTV) rates than the banks do. The bottom line is that private lenders rely on the equity a borrower has in the property to act as the security for the loan. Here are five tips to keep in mind when requesting a hard money or private capital loan:

1. Steer clear of lenders who require unreasonable upfront fees. Because most private lenders will require upfront fees to cover the costs of underwriting and due diligence, there are loan scammers who will request large upfront fees but never actually close the loan. If a lender asks for an astronomical upfront deposit, it’s probably best to walk away.
2. Keep an eye out for brokers masquerading as lenders. Some people who claim to be lenders are not actually directly in control of their own funds, but rather are brokering deals for an undisclosed third party (and charging you for the service). Reputable private lenders will happily provide verification that they fund their own loans directly.
3. Watch out for possible bait-and-switch deals. Most reputable lenders will provide you with a term sheet early on in the loan application process and will be straightforward and transparent about their underwriting process. It’s a good idea to familiarize yourself with the steps involved in the typical private lending process so that you will can keep an eye out for any red flags with potential lenders.
4. Be wary of lenders offering terms that don’t seem realistic. Private lenders charge higher interest rates and offer lower LTV rates than traditional lenders to counter the higher risks involved with these loans. If a private lender promises unrealistically low rates or 100% financing, it’s probably too good to be true.
5. Fully disclose all potential issues with the property. Private lenders put a lot of weight on a borrower’s character and reliability, so show your lender that you are trustworthy and honest by disclosing any information that could impact the transaction upfront. This can include tax liens, title issues, easements, or zoning issues.

If you have more questions about hard money or private capital loans and lenders, contact Montegra at 303-377-4181.