Whether you’re new to private capital lending or an experienced real estate investor just looking to branch out and build new lending relationships, there are some crucial questions to ask any new private capital or hard money lender with whom you are thinking of doing business. The vast majority of private 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 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 or residential real estate purchases? Private lenders will often have a niche of some sort in the types of projects they prefer to fund.

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.

3.      What are the interest rates and points normally charged by this lender? Most private lenders will charge between 9% and 12% and 1 to 3 points.

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.

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 sizeable 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 bank lenders, many will still have established guidelines for their lending process.

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 so 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 funds are 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 and sneak in larger fees, so 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.

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