There seems to be no end to the number of people and companies wanting to lend money to real estate investors. If you have a feasible project, and you have the demonstrated skills and expertise to carry out the project, then you will have plenty of financing options available to you.
So, when it comes to choosing a lender for your project, what are you looking for besides competitive rates? Of course, pricing is important, but only in context to the rest of the terms being offered. To help you find the right lender, here is a list of six factors and questions to ask prospective lenders.
Questions to qualify prospective hard money lenders:
- Hidden Fees – Besides interest rate and points, what other fees do you charge (appraisal, processing, documentation, credit, inspections, etc.)? Often times these “hidden” fees can add up to a point or more.
- Loan-to-Value – How much leverage are you willing to provide? Interest rates and points should go up or down relative to LTV. Make sure you understand how value is determined. Is it based on purchase price, value at purchase, or assumed value after renovation? Different answers result in materially different loan amounts. You will pay higher rates for higher leverage.
- Prepayment Penalties – Do you charge a prepayment penalty? If they do, then calculate how much their prepayment penalty will add to the overall cost of your loan under different timing scenarios.
- Personal Guaranties – Do you require a personal guaranty? The more you are willing to put at risk, the lower your loan costs should be. As your net worth increases, you may want to reconsider the value of keeping your personal assets shielded.
- Secondary Financing – Do you allow us to obtain gap/secondary financing? Most reputable lenders will not finance 100 percent of your project costs. You will need to fund the rest (the “gap”) with either your own capital, or with someone else’s capital, either equity from a partner, or debt from a subordinating lender. Many lenders will restrict your ability to obtain subordinated loans and will require that you have “skin in the game”. Other lenders will let you structure a no-money-down deal for yourself. Find out where your lender stands on this spectrum.
- Who’s Really Your Lender? – Who will own my loan after closing, and what about 3 to 6-months after closing? Is the lender a “portfolio lender” or really just a “broker”? They may call themselves a “lender” or even a “direct lender” but will they have the ultimate authority to make decisions about your loan down the road if things don’t go as planned?
There is a lot of money out there looking to fund your next deal. But selecting a capital partner should not be handled like a commodities trade. Pricing is just one factor to consider. Don’t be afraid to qualify lenders much the same way they qualify you as a borrower. You should select a lender as though you are selecting a financial partner. After all, isn’t that really what you are looking for?