Private Lending as Easy as 123
When it comes to Private Lending, it is all about the underwriting process. It’s no secret that a private lender approaches lending differently than a bank. Regulations, guidelines, and committees always torment banks, slowing down the decision making process. These overwrought requirements end up failing to serve the needs of prospective investment borrowers. Consequently, they seek alternative sources of financing.
Entrepreneurial borrowers will often turn to a private lender for real estate investment loans. Despite a higher cost, they do it because they cannot wait for the banks to decide if they meet all of their requirements.
Private Lending Underwriting Process Requires Less Paperwork
Banks will require tons of paperwork and will require excellent credit as a mantra. Because of their requirements, weeks can quickly turn into months. Even then, banks often say no and do so more often than they should. Especially after digging deep into the process.
We can’t speak for other private real estate lenders, but Abbey Mortgage focuses our underwriting process and decisions on the essentials of the transaction. Check out our article on Private Loan Servicing.
- Private Loan Servicing
- Private Commercial Lenders
- Local Private Money Lender
- Private Lending as an Alternative Investment
Getting to Know the Investor/Borrower
Before we get into the underwriting process, do we know our borrower and have confidence in their ability to do what they say they will do? For new investment property borrowers, this means going through a review process and meeting them to get acquainted:
- What have they done?
- How have they done financially?
- Does this transaction fit their skills base?
- Credit Scores play a minor role, but we pull them to see how payment history fits the investor’s past performance.
- Are we confident they will be able to get the job done?
Skin in the Game Is Key To Success
Does our borrower have a significant cash investment in the project? It’s one thing to sign a note to a lender based on the “value” of the property, and it’s another thing to have cash on the table. As the saying goes, “cash talks, BS walks.” It is clear when analyzing loan default information that borrowers with low or no down payment tend to default on loans at a substantially higher rate. The bottom line is that the more the borrower risks their own money, the more likely the loan will be repaid.
The Property Drives the Private Lending Decision
The property represents the keystone of the loan. It holds the whole transaction together and will be weighed heavily in our underwriting process.
- What is the investor going to pay?
- What needs to be done to enhance the property, and what will it cost?
- Will the rent support the loan upon completion?
- What value will the deal yield, and is the margin of profit worth the effort?
- How will we get repaid, and what is the plan “B”? If the whole deal falls apart, how do we, as the lender, save our investment?
Read our article, Private Lending as an Alternative Investment in Colorado to learn more about how private lending works.
Every Underwriting Process Requires Documents; We Require Less
Now that you have read our three-step process, you will know, if you have ever dealt with a bank, how straight-forward our documentation requirements are. How we work is based on the fact that we only do loans for investment and business purposes, and the fact that we loan our own money allows us to bypass consumer and regulatory requirements.
The final result is that we offer a prompt yes or no, and we fund the deal. After all, our borrowers rarely have time to wait for a slow, no answer, and a slow yes is even worse since the time for action is past.
Who Can Qualify for a Private Investment Loan?
Many of our borrowers can qualify for bank loans. However, time becomes a factor because they need money in a week or two, not two months. Although many qualify, some have had rough patches, which tend to freak out bankers. On the other hand, we view these issues as the borrower’s lessons and their degree in the business. Heck, some have earned Ph.D.’s! These folks know what to do, but sometimes it just doesn’t work out for whatever reason. We lend to them, and they are often our most reliable customers. earn more, listen to our Podcast Real Estate Investment Lending. We talk about a wide range of private lending topics.