One of the common myths of private capital or hard money lenders is that they don’t care to whom they lend funds, only about the property that secures the loan. While most private lenders focus on the property for their underwriting process, they also want to acquaint themselves with the borrower behind the property and assess their character. This underwriting aspect of private money lenders can be broken down into five basic traits:

1. Credit history. This includes the borrower’s credit score but goes beyond that one number to encompass the borrower’s broader credit history and character. Private lenders want to see that past obligations such as bills and other loans have been paid on time, but more than that they want to assess whether a borrower is trustworthy and responsible. It’s important to be upfront with your potential lender. If you have blemishes on your credit history, own them and explain them. If your lender requests additional information, get back to them with it in a timely manner. Although a low credit score will not immediately disqualify a borrower for a private capital loan, a high credit score will usually result in a lower interest rate.
2. Private lenders also like to know about your track record with past investments. If you are new to commercial real estate investment, it can be a good idea to find a partner with more experience or assemble a team of experienced people to help you manage the project. This shows your lender that you want to learn how to be a successful investor.
3. Ability to repay. While this does not necessarily mean that you must have a pile of disposable income available, it is helpful to have at least some liquidity to show that your intentions are serious. Do not expect to receive 100% financing from your private lender. In some loans it may be possible for the lender to include sufficient funds in the loan principal to make your some or all of your loan payments during the term of the loan.
4. Current capital. This is typically the least important factor for a private lender as they are less interested in the other properties you own and loans you have than in the value of the property that will secure the loan and the feasibility of your plan for the property. This directly contrasts with banks and conventional lenders who place high significance on your global debt picture
5. Exit strategy. Having a well-thought-out exit strategy for your real estate investment is the best way to demonstrate to your private lender that you have a sound investment strategy and have thought beyond the initial step of getting a good deal on a property. Will you hold onto the property as an income-producing investment, or will you rehab it and resell it right away? Be prepared to answer this question as part of your initial loan request.

Overall, what sets a private capital lender apart from conventional lenders is their interest in a borrower’s narrative. They don’t just want the numbers that a bank lives by, they want the story behind those numbers, and they are willing to customize their loans to fit the project rather than trying to force the project to fit the financing. If you have a project in need of private capital funding, contact Montegra at loans@montegra.com to learn more about our lending guidelines and our loan programs.