Hard money and private capital lenders are more open to funding projects that traditional lenders view as high risk, but this doesn’t mean that private lenders will approve any loan that crosses their desk. These lenders want to fund projects that will give them a good return on their investment and, in exchange, they underwrite and close loans in a very short timeframe. However, there are three things that a borrower can do that will definitely make a private lender not want to fund their loan:

1. Borrower lacks money or other equity to cover a downpayment. Because hard money loan requests are typically for higher-risk projects, private lenders want to know that the borrower also has some skin in the game and can’t just walk away if problems arise during the project. While private lenders will work with borrowers to structure the loan in a way that may reduce the amount of the downpayment (so that it’s not always 25% of the purchase price even with a 75% loan-to-value (LTV) rate), they will rarely take seriously a new borrower who walks in expecting 100% financing.
2. Borrower doesn’t have the cash reserves to cover the monthly interest payments. As with the previous point, private lenders want to help real estate investors stretch their dollars, but they aren’t in the business of simply handing out free money. The typical structure of hard money or private capital loan is monthly interest-only payments during the term of the loan, which is usually short-term (six months to two years), followed by a balloon payment covering the principal loan amount when the loan matures. The one exception to this rule is that, in some situations where there is enough value-added equity in a property, a private lender might be willing to roll some extra funds into the initial loan amount that will go into an account and be used to pay the monthly interest payments. However, this is a situation in which the borrower would need to show a well-planned strategy for the project and for exiting the loan.
3. Borrower doesn’t have an exit strategy. Once again, it comes down to the borrower demonstrating the ability and willingness to repay the loan. Private lenders usually only provide short-term loans of six months to two years, rather than the 30-year mortgages you can get from a bank lender. Private lenders want to know that a borrower is thinking ahead to what they want to do with a property in order to pay back the borrowed funds when the time comes. The most common exit strategies are to sell the property or refinance the property.

In a nutshell, private capital and hard money lenders want to know that if they give you the necessary funds to buy an investment property, you have a plan both for the property and for paying them back. If you can show that and your project has merit, then you’ll have a much better chance of getting your loan request approved.

If you have a private capital loan request to make, contact Montegra at 303-377-4181.