Borrowers can end up feeling like they’re caught between a rock and a hard place when unforeseen issues arise (such as a lingering lien, a property with zoning issues, or a pending bankruptcy) in the midst of applying for a loan from a traditional lender and that lender walks away from the deal. This is when hard money or private capital lenders come to the rescue by stepping in and focusing on the property’s value to overcome unexpected obstacles and approve the loan. 

One of the main reasons that private capital lenders are able to do this is that their underwriting process focuses on the value of property itself and their loan-to-value (LTV) rates are lower than those of traditional lenders (typically 50 to 65 percent, depending on whether or not the property is developed). Although hard money is typically seen as last resort money for those who can’t get approval from a traditional lender because of past mistakes or credit problems, such loans can also be useful for borrowers who don’t have any obvious credit mishaps. For example, if a borrower has a perfect credit history, but that credit history doesn’t actually have much on it, or a borrower’s income is from a pension or they’re self-employed and can’t prove sufficient income by the bank’s strict standards. These are all situations in which a private lender is happy to consider financing the loan as long as the property’s value supports it and the borrower has capital invested as well. 

There is one way in which private capital lenders and bank lenders are similar: both value honesty from their borrowers. Especially in the case of hard money loans, lenders want to know the details about any issue that might arise with the project. In fact, most private lenders have experience with common issues that can be obstacles for traditional financing and, with their expertise, such issues can often be reduced to mere stumbling blocks, allowing the project to proceed as the borrower envisioned. This is especially true in the case of large development projects because, although banks focus on the purchase price of the property, hard money lenders are able to take into consideration the effects of any approvals (such as zoning, land use, or density changes) that have already been obtained on the value of the property when they determine the LTV for the loan. The one thing that can be a deal killer for these lenders is if something turns up during their due-diligence on the loan application that the borrower was not upfront about. 

The bottom line is that private capital lenders can help borrowers out of tight lending spots if the borrower is upfront about the issues that affect the deal and can demonstrate the value of the property that will secure the loan. 

If you have an outside-the-bank project, contact Montegra at 303-377-4181 for more information about our private capital loan programs.