There are four main factors that are considered by underwriters when they are deciding whether or not to approve your loan application; collateral, character, capacity, and credit. These factors tend to be the same across the board, but what distinguishes conventional lenders from hard money or private capital lenders is the weight or emphasis given to each factor. Traditional banks have requirements that must be met for some of these, especially credit, so a low score in one area can mean immediate rejection. In contrast, private lenders have the freedom to consider the bigger picture and look at each of these as simply part of a larger whole. In this way, inadequacies in one area can be compensated for in another without resulting in immediate rejection.

Collateral

Collateral is one of the most important factors, especially for a private lender whose underwriting practice is asset-based. Take the time to fully explain why you believe this property is a good investment. Include photos and estimates for any planned repairs or improvements and information about any current tenants if it is a rental property to show possible monthly income. Share your vision for the property with your potential lender, but don’t try to hide any flaws the property has. 

If it really is a good opportunity, your lender may know from previous experience how to deal with such issues. This also leads to the next factor, as it demonstrates your character as a borrower to your potential lender.

Character

A private lender isn’t just giving you the funds you need for your project; they’re entering into a business partnership with you. Private lenders will want to meet with you in person once you submit your loan request because they want to get to know the person with whom they’re considering partnering. This partnership is also why it’s important that you’re available to your lender during the underwriting process. If your lender calls or emails you with a question or to request additional documentation about your financial obligations, make sure to respond promptly because if a lender can’t get an answer from you during the underwriting process, why should they believe they’ll hear from you when the time comes to repay the loan?

Capacity

Capacity is your ability to repay the loan. Unlike traditional mortgage lenders, which often have to consider a borrower’s global debt picture and their debt-to-income ratio, private lenders are focused solely on the property (or, in some circumstances, properties) that will secure the loan. But this is also a consideration of the borrower’s ability to carry out the project. If you lack experience in some way, it can be a good idea to bring a partner or management team on board to demonstrate to your lender that you are capable of repaying the loan.

Credit

 Even though private lenders don’t have the same good credit score requirements that banks do, that doesn’t mean they won’t want to know about your credit history. What it does mean is that if you have had any difficulties in your past payment history, a private lender will want to know the story behind such difficulties and won’t immediately toss your application in the reject pile. 

While not one of the main four c’s, another C that is important to the private capital underwriting process is communication. Establishing open communication with your lender will help you get your loan approved and closed faster and will help ensure that you have the funds you need when you need them. It’s also important to keep your lender in the loop after you’ve received the funds. If something unexpected happens, an informed lender is much more likely to work with you through any additional hurdles.

If you are considering a private loan, Montegra Capital Resources is Colorado’s top hard money lender.  We fund loans on multifamily, industrial, warehouse, retail, office, and investment purpose residential properties. We have been in business for 50 years and fund real estate loans between $200,000 and $5,000,000. Apply online or contact us to learn more.