We talk about these steps together because how you apply for a lone will greatly influence whether or not you qualify and what terms you receive. In addition to strategy, you will also want to familiarize yourself with the internal steps and documents you’ll need.
Read on below, but first – other articles in this series:
You Should Care About Private Money Loan Process
Step 1: Find Your Lender
Steps 2 & 3: Don’t Sweat the Negotiating Table
Step 4: Don’t Sweat the Negotiating Table
Step 5: Zzz…Don’t Sleep Through Loan Contract Review
Step 6: The Closing Table
Step 7: Pay Your Debt, Darn It
The private money loan application
Private money loan applications can be night and day from lender to lender. Some lenders won’t have a set application, while others are as in-depth as banks. For whatever the lender requires, you should provide complete and full disclosure. Don’t be afraid to be up front about problems in your credit report, title or the collateral. Private money lenders are good at resolving issues – and trust us, they’ve seen worse.
The more open you are, the quicker you can get a confident answer on the viability of a loan. Even if the lender doesn’t end up being able to help you due to these issues, goodwill you build here may help you work with that lender on a future deal or receive a recommendation to someone who can do the current one.
Last, be aware that although the private lending industry may seem large and siloed, lenders know and talk to each other: if one of them finds you shaded the truth of a situation, it can automatically blacklist you on working with other lenders in their circle of influence.
The Statement of Information gives the lender a snapshot of your financial situation and capacity. You’ll support this statement with other documentation, which will vary depending on your financial status, the type of loan and the collateral. Here are the common documents and information you should expect to provide:
- Tax returns
- Financial statements
- Bank statements
- Credit score
- REI experience
- Valuation information on other properties you own
- Property, purchase price and closing details
- Your plans for the property
- Exit strategy
- Desired loan terms
Think of the application process as a job interview
The amount of funding available and loan terms will be dependent on both the strength of your private money loan application file (your resume) and how you present yourself.
You should write and organize your loan file documents as neatly as possible while keeping an eye on comprehensiveness. The lender wants to know you are an organized, competent business person. In most cases, the private lender will be a stakeholder on the loan, either participating financially or having to deal with you as a loan servicer.
In addition to the file, the lender will also be looking at how you present yourself. Like a job interview, the lender wants to assure themselves that you will be able to follow through on the plans you lay out for the subject property and loan. Speak intelligently and thoughtfully about your project and your plan for the loan proceeds.
If you’re applying for a rehab loan, for example, be prepared to talk about:
- The types of properties you looked at before arriving at this one.
- Why you want to purchase this property.
- What and how you plan to renovate.
- Your business plan regarding profitability
- Your paste experience with renovations and/or real estate investing
So, you submitted your application and things are looking good. What next?
Identifying the loan program right for you
Through the private money loan application and the lender’s conversation with you, they will identify the loan program that best fits your needs and their criteria. Loan programs usually encompass the four criteria and a few high-level loan terms. Don’t expect a formal list and brochure of programs like you would see at a bank. Everything is negotiable, and the benefit of a private money lender is that they can customize a loan to fit your needs.
This is where much of the negotiation will take place as you decide on the program and receive preliminary terms. The key is to find the happy medium between the amount of profit to the lender (realized through fees, interest rate), the non-monetary covenants you must maintain and your personal guarantee, etc. You should be prepared put some “skin in the game.”
Keep in mind, the lender is not yet guaranteed to close/approve your loan. Things just look good “so far” – the lender will complete additional due diligence on you and property.
You will also receive federal and state disclosures during this step of the loan process. The disclosures:
- Will differ depending on the loan program
- Provide you with key information about the loan you’ve applied for
- Provide information designed to inform and protect you.
Know what your state laws are to ensure the lender is providing you with the necessary forms within the correct time frame and that they review them appropriately with you. Not doing so could potentially invalidate the loan at a later date.
Completing final due diligence
Whew. All that, and the lender can now process and take your loan through the final round of due diligence. You may not have much involvement in this next part of the private lender’s job, only providing additional documentation and information as the lender vets you and the property. The lender will:
- Order a preliminary title report on the property and the name/entity under which the property will be vested
- Determine the property’s value either through an appraiser, Broker Opinion Piece, Automated Valuation Model, and/or personally vising the property.
- Engage an escrow company, which is sometimes the same company as the title company, to start moving toward closing.
After the lender receives the title and reviews any unexpected liens or judgments against the property, you, or the entity under which you’re vesting the loan, they will require you to resolve any issues that may prevent them from placing title insurance or the desired loan position (usually first). You should expect that you will:
- Need to pay off (clear) any liens or judgement.
- If you had previously paid off a lien but it’s still showing in error, you will need to provide proof and/or contact the lienholder so they can provide the correct document to record the release and remove the lien record.
To approve or not to approve
After compiling all this information into a loan package, your lender will review everything together and decide whether to approve or deny your loan through their own underwriting process.
Underwriting is the term that describes the lender’s evaluation, approval or denial of a deal. How the lender runs their business and who has a stake in the decision may change the underwriting parties.
In some cases, private lenders fund deals themselves to either keep on the books or sell off to a private investor after closing. In others, the private lender will have an investor with whom they are working closely to evaluate, approve and set terms. This private investor may want to personally review your file or have their own underwriters review the package.
If your loan is denied, this is not necessarily the end of the road. Ask the lender if there is something you can do that will enable an approval or reconsideration. Although the lender will usually try to work with your further before handing back a denial, it’s always worth asking.
If you are approved, congratulations! You will soon receive formal contract terms, with the loan ready to “go to docs.” Expect a few days for this process; either the private lender or an third party company will generate the final documents. This process may take a few days or more. You will also want to give yourself a day to review – possibly with an attorney – to ensure everything is in order and that the terms match what the lender previously offered you.