Every company in our industry has a unique business model and will offer varying rates and fees, leverage, and levels of customer service. However, the best private lenders you encounter will weigh the following factors to some degree when offering you a quote and making a final lending decision.
1) Credit ScoreA borrower’s credit score is still considered to be the most reliable indicator of whether they’ll be able to repay the loan they’re given. Typically, a lower score will not disqualify an individual from receiving a loan but will affect the cost of financing. Most lenders will ask to run your credit when you first apply. Be sure to ask your sales representative if they’ll perform a credit pull and how your score may affect the interest rate and fees.
Once you’ve submitted a loan application, the lender will complete a background check. Certain items that show up during the check may disqualify someone from receiving a loan - usually white-collar felonies and/or Class A misdemeanors are the culprit. However, if you were previously convicted or charged with a felony or misdemeanor, please be sure to explain any extenuating circumstances in the application. For example, the lender may be willing to work with you if the crime happened decades ago. Each underwriting team is different and may be able to offer you some leeway.
The real estate investment experience level of a borrower can have an immense effect on the cost and types of loans available to them. For example, a career builder may be able to obtain low-interest financing for the construction of multiple town homes, but a novice renovator may receive a higher interest rate for a $10K flip! The difference in the equation is risk: if a lender is confident that a borrower can successfully complete a project because they have ample evidence of previous success, then they’ll probably feel more comfortable extending a lower interest rate. As well, lenders mitigate risk by taking some types of loans off the table to beginners. For example, some may not offer new construction financing to a person who’s never completed a project. If you’re just starting out, be sure to ask your lending partner if there are certain types of loans that may not be available to you.
Private lenders will almost certainly require their borrowers to bring at least some of their own cash to the closing table. Depending on the size of the project, you may be asked to provide a proof of funds (typically a bank statement or other proof of income) to the lender before they’ll underwrite the loan. From a lender’s perspective, the more cash a borrower brings to close, the less risky in general lending becomes. In fact, some lenders may be able to provide you with a reduced interest rate if you offer to bring a significant amount of cash to close - again, each lender is unique and multiple factors may be considered.
Check out some of our comparison graphics to see what different lending scenarios look like.
The underlying value of the tangible asset (i.e. the value of the home or lot) that’s securing the loan is by far the most important factor a lender will consider. Lenders need to know that their principal is always protected, which is understandable when it comes to money. To that end, a good lender should also let you know when a certain investment may be a poor choice. Look for a lender that can provide you with some return-on-investment (ROI) information for your deal; many can provide at least preliminary numbers during your first phone call with a few simple details.
It’s important for borrowers to have some understanding of how the criteria above may affect loan availability and the cost of financing. When reaching out to different lenders, you should be ready to discuss these items and provide any additional information they’ll need to give you an accurate quote. That way, you can make the most educated decision during your shopping period.
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