Whether you’re new to private capital lending or an experienced real estate investor just looking to branch out and build new relationships with potential lenders, there are some important questions to ask any new private capital or hard money lender with whom you are thinking of doing business. The vast majority of private money lenders are upstanding, reliable small-business owners, but as with any industry there are always a few bad apples that you will want to avoid.  

Asking the following questions can help you do your due diligence and distinguish between the reputable lenders and those who are just brokers masquerading as lenders or scam artists.

1. Do they offer loans against owner-occupied properties? 

Do they prefer to fund commercial property or residential real estate purchases? Private lenders will often have a niche of some sort in the types of projects they prefer to fund. Some lenders will only do certain types of loans or loans on certain property types. Working with a lender that specializes in your real estate investment type will give you the best chance of success.

2. In what geographic areas do they issue loans? 

Private lenders are usually local or regional because it’s easier to assess the risk of a project if they know the area well. Additionally, working with a local private capital lender is often a more personal experience.  

3.What are the interest rates and points normally charged by this lender? 

Depending on the loan amount, most private lenders will charge between 9% and 12% and 1 to 3 points. However, some may charge higher interest rates so it is important to ask your lender. 

4. What kind of loan terms do they typically offer and does the lender charge prepayment penalties? 

Most private capital loans are for six months to two years, with an option to extend for another year, but this can vary from lender to lender, or project to project. If you would like to pay off your loan amount early, it is important to understand if you will have to pay any penalties, and how much those will cost. 

5.Does the lender finance the loans with their own money or with a private capital fund that they manage themselves? 

You want to work with lenders who are funding loans with funds that they have direct control over rather than a broker posing as a lender who actually reports to someone else.

6.Do they charge borrowers an upfront fee to process the loan application and complete the underwriting process? 

What does that fee cover? It is common for private lenders to charge a nominal fee to cover the costs of the underwriting process, but you should be suspicious of any lender who requires a sizable fee, especially if they can’t tell you exactly what costs that money is covering.

7. Is the lender willing to provide a term sheet with specific loan terms and document requirements upfront? 

Reputable private lenders will always offer the borrower a term sheet before the underwriting process begins that lays out their general terms.

8. What requirements or regulations does the lender follow for its underwriting and loan documentation? 

Although private lenders are not bound by the same regulations as traditional lenders, many will still have established guidelines for their lending process. It’s important to understand what these guidelines and requirements include.

9. Will the lender keep the loan in-house or do they plan to portfolio or sell the loans off to another investor? 

One of the advantages of working with a private lender is being able to establish a business relationship with the person managing your financing. You want to know that that person will remain in charge of your loan and isn’t in the habit of selling off loans when cash flow is  short.

10.Do the originator fees charged meet with the industry standard? 

Most private lenders will charge 1 to 3 points on a hard money loan, but sometimes less reputable lenders will try to sneak in larger fees. Make sure you get the terms for your loan in writing in advance of the closing day so that there aren’t any nasty last-minute surprises that could kill your real estate deal.

If you have other questions about hard money and private capital loans and the programs offered by Montegra in Colorado, contact us at 303-377-4181 or contact us online