Private investors with cash to invest actively seek new avenues to grow their money apart from the age-old vehicles of stocks and bonds. While individuals with business ideas seek funds that are easier to access than those available with traditional/institutional lenders. One party has money, the other needs money. Both parties have a need, and when they meet, everyone can go away with positive returns and with their goals achieved.
That’s the appeal and the basis of private money lending.
Potential borrowers can source for capital from two avenues:
- Personal investors with capital including family/friends or from pooled investment funds where a group of people pool money together to fund loans.
- Corporate entities called private lenders who have capital that they manage and issue as loans.
How Banks Make The Decision To Lend Capital.
Banks have their modus operandi for assessing every request for capital.
Credit: What is the borrower’s credit reputation in terms of their credit score and payment history?
Capacity: Has the borrower shown evidence that they can make payments when due?
Collateral: What is the value of the asset pledged as collateral on the loan?
Even if the borrower scores well on two points but fails on one point, the chances are high that the loan will not be approved.
This kind of scenario creates an opportunity for borrowers and private lenders to do business.
Finding The Best Loan For Your Needs.
Once you have decided to use a private lender, you now have to consider finding reputable lenders and choosing one. You could get one through referrals from family, friends, and acquaintances or through a real estate mortgage broker.
The real estate mortgage broker is an independent and licensed professional who matches borrowers with investors based on the unique requirements and situation of both parties. The broker will guide you through the entire loan process and handle the packaging and delivery of the loan from start to finish.
As you can imagine, private investors are shrewd and experienced business people. They will guard their money carefully and make investment decisions after careful considerations. The brokers know this too and will also want to protect their reputation. As a result of this, each broker will have different loan programs in their portfolio with different terms depending on the lending criteria of each investor. Discuss with a real estate broker to find out exactly what they can offer you and if they can find an investor for your kind of project.
Note that private loan terms and rates are usually much higher than traditional banks. They are for a shorter term too. That’s why they are called “hard money” loans.
With that in mind, let’s look at the process you can expect when you apply for private lending.
Finding Reputable Private Lenders
You’ll have to go the extra mile to find private lenders as they are not as common as banks.
- Ask for referrals from your acquaintances.
- Check online and read reviews from past clients.
- Use a directory service.
Once you narrow down the choices of lenders to about two or three, you can dig deeper to get an idea of how they operate. Ask for references from their past clients and check other things like their foreclosure rates and who funds their loans. Such information can save you a lot of grief in the long term. For instance, lenders with a high foreclosure rate may be less tolerant of even the slightest deviation from the loan terms. You can find out information about foreclosures from your county courts online or in person.
Private Money Lending Process
Submit Your Loan Application
The process officially starts with filling out a loan application and an SI (Statement of information).
Usually, the other documents you may be asked to provide will vary depending on the type of loan, your financial standing and the collateral you are providing. These documents will differ depending on the demands of the lender/investor, but they typically include tax returns, bank statements, property valuation reports, etc.
Ensure you provide as much information as possible in a clear and timely manner, especially on your financial position. This will start the whole process off on a good note for all parties concerned.
The SI form, in particular, is vital for a quick and thorough title search on the collateral asset.
Review Of Your Financial Situation
One major reason borrowers opt for private lending is that they get a quicker response to their application as compared to the banks. Hard money lenders are accustomed to working with borrowers with financial “problems” so come clean with any problems you have with the collateral or your credit score. This will help the lender make a decision as quickly as possible.
Choosing The Right Loan Program
There are different types of loans with specific terms attached to each one. Some offer more favorable conditions than others and also more funds than others. You can greatly increase your chances of getting a good deal by your presentation. The lender will have more confidence to release his or her money to you when they assess you to be an organized and focused person. Your documents, business plans (if required) and other files should be neatly arranged and information stored so that it’s easy to retrieve and read. If this is your first time seeking a loan, you may be nervous, and that’s okay. Just remain calm and think carefully before you respond to any questions.
After this hurdle, you will get details about the loan terms and mandatory requirements like state and federal disclosures for your review.
Processing The Loan: Title Report, Property Appraisal, and Escrow Services.
At this stage, all parties have agreed on a particular loan type, and the loan process proper can start.
The lender/designated loan officer will play a more active role, and you may be expected to provide more information as time passes. There are three main steps for this stage:
- Title report. A title company will search county records for any encumbrances or liens against the borrower’s property and other entities associated with him/her. Based on that, the title company will prepare a preliminary title report offering title insurance on the said property.
- Property appraisal. There are several ways to estimate the value of the collateral property. The most common methods are: get an appraisal by a licensed appraiser, obtain a Broker Price Opinion or BPO through a real estate broker or use an Automated Valuation Model (AVM) to estimate the value using a mathematical model based on comparative property values and other data. The investor will usually carry out an independent valuation of his own to ascertain the property value.
- Escrow services. This service is provided by an appointed third party company, and they are responsible for collecting and disbursing the loan funds as agreed. They will also oversee the loan closing process, and get the relevant documents like mortgage and trust deeds, etc. recorded at the county office.
Some states in the USA permit an escrow officer to handle these duties while others require an attorney to oversee the process.
Review of Documents
Any outstanding liens or judgments must be resolved before the loan can be funded.
If there is a need to liquidate the asset, the investor wants assurance that he/she will be in the priority position (first position) to benefit from the sales of the property. A title insurance company will not be inclined to offer coverage otherwise.
You should also confirm that any previous lienholder has recorded the release for past debts as these could show up as still pending against you.
Once the lender and investor are satisfied with the property value, title and every other requirements are met, you should be advised that the loan has been approved. Thereafter, you will receive the necessary documentation for signing. You should read through them carefully and take your time to sign them while taking note of any changes. Ask questions about any points that are not clear.
You will be presented with the documents for sign off. You may sign them at the escrow company, in the lender’s office, or they can be signed in your home or office under the supervision of a notary service.
The private money lender wires the funds to the escrow company for disbursement as directed by the investor.
Recording Of Documents
The escrow company records the deeds, mortgages at the county and this loan legally becomes a lien against your real asset until you pay it off.
Once these records are confirmed, the escrow company will disburse the funds.
Payments To The Loan Servicer
Once the funds leave the escrow company and get to you, the loan servicer’s job begins. They will board the loan (add it to their loan system), and start receiving the monthly payments and sending loan statements.
The lender will advise you on when the first payment is due, and often interest will be prepaid 30 days in advance to allow the servicer time to get the loan boarded.
If you are in doubt at anytime especially as regards payment dates, confirm from your lender as they are in the best position to know and keep you informed and on track throughout the duration of the loan.