7 Questions You Must Ask a Private Money Lender When Applying for a Loan

Private money lenders can provide specialized funding for property development. These lenders offer quick, up-front cash for acquisitions, construction, and refurbishment, allowing builders, landlords, flippers, and others to start and finish projects on time.

If you’re considering utilizing a private money lender, you should know what services they provide, how much they charge, and what you can expect. We’ll go through the most crucial questions to ask a private money lender to maximize your return on investment and determine if this sort of finance is best suited for you.

Questions to Ask Private Money Lenders

Before choosing a private money lender, we recommend doing some initial screening. At a minimum, you should ask the following questions:

1. Do They Lend Direct, or are They a Broker for Other Lenders?

Some firms and individuals may position themselves as direct lenders when, in fact, they are brokers. As a broker, they represent several lending institutions. So, what is their motivation? Offering you the best rate or receiving the best commission? Most brokerages are honest, but the financial services business is riddled with con artists and swindlers. Knowing who you are dealing with is critical for you as the borrower.

Direct lenders have full control over their lending criteria, loan terms, and rates and you’ll have direct communication with the entity that’s funding the loan. Additionally, you’ll avoid any add-on fees from middlemen like brokerages.

2. How Experienced is the Lender in Private Money Lending?

This is the most obvious question to ask a private money lender. It is essential to consider how long a company or individual has been in the private money lending sector. Just as you wouldn’t trust your automobile to a technician with no track record, you should be cautious about who lends you money. How long have they been in business, and what is their reputation? Ask around.

3. Is the Loan Based on ARV?

The After Repair Value (ARV) of the property you want to finance is one aspect that can affect a lender’s decision. Other aspects may be considered, such as your borrowing history, credit score, level of experience, and so forth.

Some of these factors may mean different things to different lenders. The ARV is the most crucial consideration for some. A good ARV assures the lender that they can recover their investment. When calculating your maximum allowable offer for a property, the ARV is also vital.

4. Will You Provide References from Past Borrowers?

Unfortunately, many businesses claim to offer one thing but do quite the opposite. This is especially true for private money lenders. A lender may present itself as well-established and knowledgeable, but its processes are currently disorganized and inefficient.

When screening potential lenders, there is a simple approach to confirm whether or not the marketing pitch matches reality: ask for references. When working with a private money lender, we recommend requesting contact information for at least three previous clients. And if a private money lender refuses to provide references, this should raise a red flag.

5. What Other Fees Do They Charge for a Loan

Some private money lenders will quote interest rates and points and then conveniently wait to inform the borrower of further documents, origination, or processing expenses. For a fair cost comparison between other lenders, ask for all fees upfront and incorporate them into the total cost of the loan.

Regular transaction expenses such as escrow, title insurance, recording, and notary fees will apply to all loans, but these are not fees paid to the private money lender.

6. How Do You Handle Loan Draws?

A standard mortgage provides a single lump sum to purchase a home. Lenders can take this risk because of the high quality of the collateral. In other words, they make loans on completed, ready-to-move-in homes that require no or few renovations. If you cease making mortgage payments, they can foreclose on the property, sell it, and reclaim the total loan.

In contrast, private money lenders use distressed homes as collateral and make loans based on what the property value will become. For example, suppose you qualify for a $210k private money loan with a $300k ARV. That property isn’t worth $300k – or even $210k. As a result, if a private money lender had to foreclose on the property, they would not receive their entire $210k debt.

To cater to this reality, private money lenders provide loans in draws. For example, you might get your first draw to buy a house. Then, after completing a specific percentage of the repairs, you may be eligible for a second draw. Each private money lender organizes these draw requests differently. As a result, you must grasp a lender’s draw procedures and requirements.

7. How Long Will It Take To Fund The Loan?

The key benefit of private money loans is their speed. A solid private money lender may finalize a deal in less than a couple of weeks or even days, but a standard mortgage takes 30 to 45 days to close (or faster). Nevertheless, not all lenders have such well-established and simplified systems, which means loans will take longer to close.

Time is money for investors. As a result, you’ll want the private money loan draws to be distributed as soon as possible after the ARV appraisal. A seasoned lender should be able to finalize a loan within a few days of receiving the final appraisal report. Therefore, asking your lender about the expected loan closing timelines and what to expect is essential.

Get A Private Money Loan Through Merchant Mortgage & Trust Corporation

If you’re looking to get into fix-and-flip or seeking to finance your next small-sized commercial property, Merchants Mortgage & Trust Corporation can provide information on getting a private money loan for your next fix-and-flip or construction project.

Merchants Mortgage and Trust has been the private lender of choice for real estate developers across the United States since 1961. We pride ourselves on building successful, long-term relationships with our clients. If you are interested in learning more about our competitive commercial multifamily financing options and would like a no-obligation quote, we’re happy to connect, so contact us today!

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FOR PAYOFFS: [email protected]

FOR BILLING QUESTIONS: [email protected]

FOR REPAIR DRAWS: [email protected]

FOR AUTOMATIC DRAFT PAYMENTS (ACH): [email protected]

FOR VERIFICATION OF MORTGAGE: [email protected]