Are You Asking Your Private Money Lender These Questions?

Even if you’re an experienced property investor, working with a private money lender for the first time can be a daunting experience. You may worry about how quickly the loan will be funded, what kind of terms you’ll face, and whether any hidden fees will sneak up on you and ruin your bottom line.

Not all private money lenders are made equally, so it is important to do your homework and compare the rates of a few different house flipping loans before making any decisions. As you try to decide which lender is right for you, here are five questions that you should be asking.

• Do you underwrite your own loans?

Many private many lenders are not lenders at all but brokers. Companies that broker private money loans or hard money loans can provide a useful service for clients, but in most cases working with a broker will mean that you pay higher rates than you need to. It is advisable to work with a lender that controls its own funds, makes its own loan decisions, and underwrites all of its own loans.

• What is your license number?

It is vital to check that your lender is licensed by the state in which you’re operating. Plenty of scam artists out there pose as lenders in order to get financial information. Check the reputation of your lender by looking up the status of their license, checking them out on the Better Business Bureau website, and asking for references. They should be willing to put you in contact with past and current clients to verify their reputation.

• Will you walk me through your loan programs?

The rate that a lender is willing to give is just one of several factors that will affect how much you actually end up spending on the loan. How many points does the loan have? What loan to value ratio do they require? Are there any origination fees or prepayment penalties? Will the loan be based on the after-repair value or the property’s current value? What will the term of the loan be? Get all of this information in writing so that you can do your own calculations at home and better compare various loan offers.

• What kind of down payment do you require?

If a lender offers you a loan on a property without requiring that you also put money toward the purchase price, run away. Requiring a down payment – usually in the range of 20% of the purchase price for novice investors – shows the lender that you have skin in the game and that they can trust you. If they make no such requirement, it may be an indicator that the lender has no interest in whether or not your investment succeeds, because they will profit off of you either way. This isn’t the kind of lender that you want to work with.

• How long will the loan take to close?

How many days or weeks will it be before you have your financing in hand? The best house flipping tips and tricks won’t get you anywhere if you can’t get ahold of reliable financing when a hot property becomes available. Top lenders can fund loans in ten business days or less and provide letters of pre-approval to help facilitate a streamlined purchase process.