Key Qualities to Consider in a Borrower Before Offering Private Money Loans

[Karen Smith]

What Qualities Should You Look for in a Borrower Before Offering Private Money Loans?

[Brandon Croucier]

Fico, LTV, Experience, Make sure no BK's or Foreclosures.

[Steve Hiltabiddle]

@Karen Smith   @Brandon Croucier provides a very concise but accurate answer.  Other answers might include the acronym CIA:  Credit Income and Assets but that leaves out the items Brandon mentions.   Beyond just the borrower characteristics, you might want to remember the broader 5 'C's' of Credit: Character, Capacity, Collateral, Capital, and Conditions.

As a smaller lender myself, I focus on the Borrower first and their ability to get a project across the line with as little headaches (to me) as possible.  Then once I feel like they may be a suitable borrower for my business model, I consider the deal.   I know others may focus on the deal first but for me, I want to find someone with experience and integrity with an interest in a long term business relationship.  That can take some time, a few phone calls, a site visit, etc but I find it can avoid problems down the road.

Good luck,

Steve

[Karen Smith]

Quote from @Brandon Croucier:

Fico, LTV, Experience, Make sure no BK's or Foreclosures.

Those are great points to consider when evaluating potential borrowers. In your experience, how do you weigh each factor—like FICO, LTV, or prior bankruptcies—when making a decision? Also, how much does the borrower’s track record or experience influence your final choice, especially if they've had success with similar projects?

[Karen Smith]

Quote from @Steve Hiltabiddle:

@Karen Smith   @Brandon Croucier provides a very concise but accurate answer.  Other answers might include the acronym CIA:  Credit Income and Assets but that leaves out the items Brandon mentions.   Beyond just the borrower characteristics, you might want to remember the broader 5 'C's' of Credit: Character, Capacity, Collateral, Capital, and Conditions.

As a smaller lender myself, I focus on the Borrower first and their ability to get a project across the line with as little headaches (to me) as possible.  Then once I feel like they may be a suitable borrower for my business model, I consider the deal.   I know others may focus on the deal first but for me, I want to find someone with experience and integrity with an interest in a long term business relationship.  That can take some time, a few phone calls, a site visit, etc but I find it can avoid problems down the road.

Good luck,

Steve

That's a great approach, Steve! Focusing on the borrower first, especially their experience and integrity, can really help mitigate issues down the line. How do you balance the time it takes to vet borrowers—like site visits and calls—with the urgency of closing deals? Do you find that this process pays off in terms of fewer headaches or challenges later in the project?

[Chris Seveney]

Quote from @Karen Smith:

What Qualities Should You Look for in a Borrower Before Offering Private Money Loans?

 Skin in the game. Are they putting down money as a down payment and do they have a primary residence they realize they could also lose if they do not pay you (depends on state). 

That is an important factor. When they have a lot to lose, they will perform much better. Also as a sidenote I assume you are lending on non owner occupied homes - never lend on an owner occupied property.

[Amir Khan]

Quote from @Karen Smith:

What Qualities Should You Look for in a Borrower Before Offering Private Money Loans?

You've received some excellent answers from everyone.

I might add, I would also check the track record on completed projects (specifically the type of projects you are interested in funding). Ask for details on those projects including time-line and how unexpected issues/challenges were resolved.

[Steve Hiltabiddle]

Quote from @Karen Smith:

Quote from @Steve Hiltabiddle:

@Karen Smith   @Brandon Croucier provides a very concise but accurate answer.  Other answers might include the acronym CIA:  Credit Income and Assets but that leaves out the items Brandon mentions.   Beyond just the borrower characteristics, you might want to remember the broader 5 'C's' of Credit: Character, Capacity, Collateral, Capital, and Conditions.

As a smaller lender myself, I focus on the Borrower first and their ability to get a project across the line with as little headaches (to me) as possible.  Then once I feel like they may be a suitable borrower for my business model, I consider the deal.   I know others may focus on the deal first but for me, I want to find someone with experience and integrity with an interest in a long term business relationship.  That can take some time, a few phone calls, a site visit, etc but I find it can avoid problems down the road.

Good luck,

Steve

That's a great approach, Steve! Focusing on the borrower first, especially their experience and integrity, can really help mitigate issues down the line. How do you balance the time it takes to vet borrowers—like site visits and calls—with the urgency of closing deals? Do you find that this process pays off in terms of fewer headaches or challenges later in the project?

 Hi Karen,   Again, being a smaller lender, my goal is not to have dozens and dozens of borrowers doing a deal a year but work with experienced borrowers doing 1-2 deals a month.  All I need is a handful of solid active borrowers to keep my money active.  With this approach, I can very easily vet borrowers (no newbies unless partnering with an experienced investor for example) and focus on those that meet my criteria.   More often than not, I'm speaking to someone who isn't in a rush to fund a deal so time is typically available to have a handful of calls, perhaps meet for coffee although a face-to-face is nice but not a requirement.      If I had a lot of capital to deploy I might focus more on the deal first.  After speaking with a number of Investors, there are a number of ways I can get to a quick 'No' either on a deal or the investor which also saves time.  As in any business, there are a lot of tire-kickers which minimizes the amount of time I may spend beyond a quick intro call.

Good luck,

Steve

[Karen Smith]

Quote from @Chris Seveney:

Quote from @Karen Smith:

What Qualities Should You Look for in a Borrower Before Offering Private Money Loans?

 Skin in the game. Are they putting down money as a down payment and do they have a primary residence they realize they could also lose if they do not pay you (depends on state). 

That is an important factor. When they have a lot to lose, they will perform much better. Also as a sidenote I assume you are lending on non owner occupied homes - never lend on an owner occupied property.

That’s a great point! Having skin in the game definitely makes borrowers more motivated to follow through. When someone has a significant amount of their own money invested or even risks losing their primary residence, it changes their approach and commitment to the project.

Do you typically have a minimum down payment requirement for your borrowers? And how do you usually assess the level of risk in situations where the borrower might not have as much at stake? I'd love to hear more about your approach, especially with non-owner occupied properties.

[Karen Smith]

Quote from @Amir Khan:

Quote from @Karen Smith:

What Qualities Should You Look for in a Borrower Before Offering Private Money Loans?

You've received some excellent answers from everyone.

I might add, I would also check the track record on completed projects (specifically the type of projects you are interested in funding). Ask for details on those projects including time-line and how unexpected issues/challenges were resolved.

You’ve made a great point about checking the borrower’s track record on completed projects. Seeing how they’ve handled similar projects—especially when things didn’t go as planned—can give valuable insight into their problem-solving skills and reliability.

How do you usually gather this kind of information? Do you rely on references from previous lenders, or do you request more detailed project reports? I'd be interested to hear how you approach evaluating a borrower’s past performance and how that plays into your final lending decision.

[Karen Smith]

Quote from @Steve Hiltabiddle:

Quote from @Karen Smith:

Quote from @Steve Hiltabiddle:

@Karen Smith   @Brandon Croucier provides a very concise but accurate answer.  Other answers might include the acronym CIA:  Credit Income and Assets but that leaves out the items Brandon mentions.   Beyond just the borrower characteristics, you might want to remember the broader 5 'C's' of Credit: Character, Capacity, Collateral, Capital, and Conditions.

As a smaller lender myself, I focus on the Borrower first and their ability to get a project across the line with as little headaches (to me) as possible.  Then once I feel like they may be a suitable borrower for my business model, I consider the deal.   I know others may focus on the deal first but for me, I want to find someone with experience and integrity with an interest in a long term business relationship.  That can take some time, a few phone calls, a site visit, etc but I find it can avoid problems down the road.

Good luck,

Steve

That's a great approach, Steve! Focusing on the borrower first, especially their experience and integrity, can really help mitigate issues down the line. How do you balance the time it takes to vet borrowers—like site visits and calls—with the urgency of closing deals? Do you find that this process pays off in terms of fewer headaches or challenges later in the project?

 Hi Karen,   Again, being a smaller lender, my goal is not to have dozens and dozens of borrowers doing a deal a year but work with experienced borrowers doing 1-2 deals a month.  All I need is a handful of solid active borrowers to keep my money active.  With this approach, I can very easily vet borrowers (no newbies unless partnering with an experienced investor for example) and focus on those that meet my criteria.   More often than not, I'm speaking to someone who isn't in a rush to fund a deal so time is typically available to have a handful of calls, perhaps meet for coffee although a face-to-face is nice but not a requirement.      If I had a lot of capital to deploy I might focus more on the deal first.  After speaking with a number of Investors, there are a number of ways I can get to a quick 'No' either on a deal or the investor which also saves time.  As in any business, there are a lot of tire-kickers which minimizes the amount of time I may spend beyond a quick intro call.

Good luck,

Steve

It sounds like you’ve established a solid approach to lending, focusing on experienced borrowers who can keep your capital active without rushing into deals. I’m curious—what are some of the key factors that help you quickly determine whether to move forward with a borrower or pass on a deal? Do you have a specific set of criteria you rely on, or does it vary depending on the investor and the project?

Also, when you do get a “quick no,” is it more often due to the borrower’s experience, the structure of the deal, or other factors? Would love to hear how you streamline this vetting process and keep things efficient!

[Jeff S.]

The property is important to us, and the numbers must show the deal will produce a fair profit, but as direct lenders (i.e., we lend our own money) we always bet on the borrower first. A bad borrower can ruin even a good deal. A good, well-qualified borrower will rarely get into trouble.

“How do you balance the time it takes to vet borrowers—like site visits and calls—with the urgency of closing deals?”

There’s nothing to balance. We meet our borrowers in advance of any deal, typically first at a real estate club, and we spend time getting to know them. This usually involves going to dinner once or twice and visiting their properties if they happen to have something in progress. We also review prior closing statements. In our experience, the only way to judge a person’s character is face-to-face. On the rare occasion that we get an urgent call from someone we haven’t gotten to know yet, we politely decline the loan.

If you are dealing with borrowers who have been doing this since the crash, then almost certainly, they will have a bankruptcy around 2010 or so. We also know several who got hit hard when lenders shut/slowed down during COVID. It’s no big deal so long as their bankruptcy is over. Foreclosure is another issue. This tells us they might not be as skilled as they want us to believe.

We only lend to local, experienced house flippers who do this full-time. We require at least three successful local flips in the last two years, which isn’t much. In fact, virtually everyone we loan to has flipped many more properties. No newbies or hobbyists. Not on our dime. Sorry, but real estate must be your profession.

If you are brokering to others, an affiliate, or a correspondent, then none of this matters. Your lender, who provides the funds, will have their own borrower criteria, which they should communicate to you.

[Richard Mark]

Quote from @Jeff S.:

The property is important to us, and the numbers must show the deal will produce a fair profit, but as direct lenders (i.e., we lend our own money) we always bet on the borrower first. A bad borrower can ruin even a good deal. A good, well-qualified borrower will rarely get into trouble.

“How do you balance the time it takes to vet borrowers—like site visits and calls—with the urgency of closing deals?”

There’s nothing to balance. We meet our borrowers in advance of any deal, typically first at a real estate club, and we spend time getting to know them. This usually involves going to dinner once or twice and visiting their properties if they happen to have something in progress. We also review prior closing statements. In our experience, the only way to judge a person’s character is face-to-face. On the rare occasion that we get an urgent call from someone we haven’t gotten to know yet, we politely decline the loan.

If you are dealing with borrowers who have been doing this since the crash, then almost certainly, they will have a bankruptcy around 2010 or so. We also know several who got hit hard when lenders shut/slowed down during COVID. It’s no big deal so long as their bankruptcy is over. Foreclosure is another issue. This tells us they might not be as skilled as they want us to believe.

We only lend to local, experienced house flippers who do this full-time. We require at least three successful local flips in the last two years, which isn’t much. In fact, virtually everyone we loan to has flipped many more properties. No newbies or hobbyists. Not on our dime. Sorry, but real estate must be your profession.

If you are brokering to others, an affiliate, or a correspondent, then none of this matters. Your lender, who provides the funds, will have their own borrower criteria, which they should communicate to you.

 Spot on Jeff. Goes with the old saying, the best deals you do are the ones you don't. We have a policy we meet all our borrowers on site to shake their hand and walk the property before issuing a term sheet. You can sniff out a borrower who doesn't know their business inside and out much quicker this way. To your original question Karen, as private lenders you are going to get deals where borrowers have low credit scores or are in tricky financial situations. So, while this information is important to collect and consider, you can't fully rely on these metrics to tell the full story. Collateral is first and foremost, but the borrowers ability to execute the business plan within the term of the loan is next most important. 

[Amir Khan]

Quote from @Karen Smith:

Quote from @Amir Khan:

Quote from @Karen Smith:

What Qualities Should You Look for in a Borrower Before Offering Private Money Loans?

You've received some excellent answers from everyone.

I might add, I would also check the track record on completed projects (specifically the type of projects you are interested in funding). Ask for details on those projects including time-line and how unexpected issues/challenges were resolved.

You’ve made a great point about checking the borrower’s track record on completed projects. Seeing how they’ve handled similar projects—especially when things didn’t go as planned—can give valuable insight into their problem-solving skills and reliability.

How do you usually gather this kind of information? Do you rely on references from previous lenders, or do you request more detailed project reports? I'd be interested to hear how you approach evaluating a borrower’s past performance and how that plays into your final lending decision.

I am not a lender, I have my pool of lenders that lend through our investor portal for our deals (so I am the borrower).

My suggestion about checking the track record stems from our lenders asking about our past deals. I share with our lenders the the addresses and a brief summary of some of recent deals including their history and outcome. Once the deal details are reviewed, it helps our lenders assess the type of property and strategy we use and how successful we are in it.

If you wanted to deep dive on your own, you can always check with county records on fillings, operators' good standing records from state where incorporated etc as well.

[Karen Smith]

Quote from @Jeff S.:

The property is important to us, and the numbers must show the deal will produce a fair profit, but as direct lenders (i.e., we lend our own money) we always bet on the borrower first. A bad borrower can ruin even a good deal. A good, well-qualified borrower will rarely get into trouble.

“How do you balance the time it takes to vet borrowers—like site visits and calls—with the urgency of closing deals?”

There’s nothing to balance. We meet our borrowers in advance of any deal, typically first at a real estate club, and we spend time getting to know them. This usually involves going to dinner once or twice and visiting their properties if they happen to have something in progress. We also review prior closing statements. In our experience, the only way to judge a person’s character is face-to-face. On the rare occasion that we get an urgent call from someone we haven’t gotten to know yet, we politely decline the loan.

If you are dealing with borrowers who have been doing this since the crash, then almost certainly, they will have a bankruptcy around 2010 or so. We also know several who got hit hard when lenders shut/slowed down during COVID. It’s no big deal so long as their bankruptcy is over. Foreclosure is another issue. This tells us they might not be as skilled as they want us to believe.

We only lend to local, experienced house flippers who do this full-time. We require at least three successful local flips in the last two years, which isn’t much. In fact, virtually everyone we loan to has flipped many more properties. No newbies or hobbyists. Not on our dime. Sorry, but real estate must be your profession.

If you are brokering to others, an affiliate, or a correspondent, then none of this matters. Your lender, who provides the funds, will have their own borrower criteria, which they should communicate to you.

It sounds like you have a thorough, relationship-driven approach to lending, which really sets the stage for success by focusing on the borrower’s track record and character first. How do you usually structure those early meetings and conversations to ensure you get a complete picture of their experience and reliability? Also, what’s your process when reviewing past closing statements or visiting current projects to assess their work?

[Karen Smith]

Quote from @Amir Khan:

Quote from @Karen Smith:

Quote from @Amir Khan:

Quote from @Karen Smith:

What Qualities Should You Look for in a Borrower Before Offering Private Money Loans?

You've received some excellent answers from everyone.

I might add, I would also check the track record on completed projects (specifically the type of projects you are interested in funding). Ask for details on those projects including time-line and how unexpected issues/challenges were resolved.

You’ve made a great point about checking the borrower’s track record on completed projects. Seeing how they’ve handled similar projects—especially when things didn’t go as planned—can give valuable insight into their problem-solving skills and reliability.

How do you usually gather this kind of information? Do you rely on references from previous lenders, or do you request more detailed project reports? I'd be interested to hear how you approach evaluating a borrower’s past performance and how that plays into your final lending decision.

I am not a lender, I have my pool of lenders that lend through our investor portal for our deals (so I am the borrower).

My suggestion about checking the track record stems from our lenders asking about our past deals. I share with our lenders the the addresses and a brief summary of some of recent deals including their history and outcome. Once the deal details are reviewed, it helps our lenders assess the type of property and strategy we use and how successful we are in it.

If you wanted to deep dive on your own, you can always check with county records on fillings, operators' good standing records from state where incorporated etc as well.

It’s great to hear how you provide transparency to your lenders by sharing recent deal details and summaries—it really builds trust. When you're presenting past deals to your lenders, how do you decide which deals to highlight, especially in terms of property type or strategy? Also, when your lenders dive deeper into county records or operator standings, do you find they tend to uncover any common concerns, or is it more of a formality for peace of mind?

[Amir Khan]

Quote from @Karen Smith:

Quote from @Amir Khan:

Quote from @Karen Smith:

Quote from @Amir Khan:

Quote from @Karen Smith:

What Qualities Should You Look for in a Borrower Before Offering Private Money Loans?

You've received some excellent answers from everyone.

I might add, I would also check the track record on completed projects (specifically the type of projects you are interested in funding). Ask for details on those projects including time-line and how unexpected issues/challenges were resolved.

You’ve made a great point about checking the borrower’s track record on completed projects. Seeing how they’ve handled similar projects—especially when things didn’t go as planned—can give valuable insight into their problem-solving skills and reliability.

How do you usually gather this kind of information? Do you rely on references from previous lenders, or do you request more detailed project reports? I'd be interested to hear how you approach evaluating a borrower’s past performance and how that plays into your final lending decision.

I am not a lender, I have my pool of lenders that lend through our investor portal for our deals (so I am the borrower).

My suggestion about checking the track record stems from our lenders asking about our past deals. I share with our lenders the the addresses and a brief summary of some of recent deals including their history and outcome. Once the deal details are reviewed, it helps our lenders assess the type of property and strategy we use and how successful we are in it.

If you wanted to deep dive on your own, you can always check with county records on fillings, operators' good standing records from state where incorporated etc as well.

It’s great to hear how you provide transparency to your lenders by sharing recent deal details and summaries—it really builds trust. When you're presenting past deals to your lenders, how do you decide which deals to highlight, especially in terms of property type or strategy? Also, when your lenders dive deeper into county records or operator standings, do you find they tend to uncover any common concerns, or is it more of a formality for peace of mind?

We share as much details regarding the transaction as we can. In most case, our lenders would probably ask additional questions and require clarifications when it is their first deal. Usually, after the first deal, the trust is built and we just ensure we keep building on that trust.

If lenders do any other investigation on their end, they are welcome to, but I've not had anyone share anything that they've discovered that was of a concern.

[Karen Smith]

Quote from @Amir Khan:

Quote from @Karen Smith:

Quote from @Amir Khan:

Quote from @Karen Smith:

Quote from @Amir Khan:

Quote from @Karen Smith:

What Qualities Should You Look for in a Borrower Before Offering Private Money Loans?

You've received some excellent answers from everyone.

I might add, I would also check the track record on completed projects (specifically the type of projects you are interested in funding). Ask for details on those projects including time-line and how unexpected issues/challenges were resolved.

You’ve made a great point about checking the borrower’s track record on completed projects. Seeing how they’ve handled similar projects—especially when things didn’t go as planned—can give valuable insight into their problem-solving skills and reliability.

How do you usually gather this kind of information? Do you rely on references from previous lenders, or do you request more detailed project reports? I'd be interested to hear how you approach evaluating a borrower’s past performance and how that plays into your final lending decision.

I am not a lender, I have my pool of lenders that lend through our investor portal for our deals (so I am the borrower).

My suggestion about checking the track record stems from our lenders asking about our past deals. I share with our lenders the the addresses and a brief summary of some of recent deals including their history and outcome. Once the deal details are reviewed, it helps our lenders assess the type of property and strategy we use and how successful we are in it.

If you wanted to deep dive on your own, you can always check with county records on fillings, operators' good standing records from state where incorporated etc as well.

It’s great to hear how you provide transparency to your lenders by sharing recent deal details and summaries—it really builds trust. When you're presenting past deals to your lenders, how do you decide which deals to highlight, especially in terms of property type or strategy? Also, when your lenders dive deeper into county records or operator standings, do you find they tend to uncover any common concerns, or is it more of a formality for peace of mind?

We share as much details regarding the transaction as we can. In most case, our lenders would probably ask additional questions and require clarifications when it is their first deal. Usually, after the first deal, the trust is built and we just ensure we keep building on that trust.

If lenders do any other investigation on their end, they are welcome to, but I've not had anyone share anything that they've discovered that was of a concern.

It’s great that you're transparent with your lenders and build trust over time. How do you typically handle any concerns or clarifications that come up during the first deal? Do you have a set process for providing additional information? Also, I’m curious—have you found that lenders’ confidence grows after seeing how smoothly things run, or are there certain aspects of the deal where they tend to focus their due diligence?