Private Lenders: I could really use some honest perspective

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Private Lenders: I could really use some honest perspective

Kate Porter
Investor · Beverly, MA · Member since 2017 · 23 posts · 7 votes

I've been researching the private lending process pretty deeply, particularly what happens around borrower and entity diligence, and I could really use some perspective from people who actually do this day to day.

I've spent a ridiculous amount of time reading about the process and talking to people, but I'm realizing there are some things you just can't understand from the outside.

I'm especially curious about:

  • What information are you actually manually checking against other sources?
    For example, borrower/entity information, state filings, EIN documentation, operating agreements, bank information, title, insurance, appraisal, closing documents, etc.

  • What kinds of discrepancies actually cause you to stop and investigate?
    I'm much more interested in the things that genuinely happen in your workflow than hypothetical fraud scenarios.

  • Where does your team spend the most time going back and forth to get a file right?

  • When a loan gets reviewed by a warehouse lender, investor, or another downstream party, what tends to get questioned or kicked back?

  • What LOS do you use, and what parts of your diligence process still happen outside of it?

  • If you could wave a magic wand and eliminate one tedious verification or reconciliation task from your lending process, what would it be?

I've actually already built quite a bit around this, but the more I research and talk to people, the more I'm questioning whether I'm approaching the problem in the right way. I'm trying to make sure I'm solving a real, painful problem rather than falling in love with something I've already built.

I'm not trying to sell anything here. At this point, I genuinely want to understand how lenders actually work, where the friction really is, and what I'm missing.

If you're willing to share your experience here, I'd genuinely appreciate it and if anyone would be open to a 20-minute conversation, I'd be incredibly grateful. I mostly want to listen, learn, and pressure-test what I've built and what I think I've learned so far.

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Jason WrayPro Member
Banker · Nationwide · Member since 2020 · 2k+ posts · 1k+ votes
1mo

Kate,

As a 20 Year Veteran being on both the Owner/Lender side and now as an FDIC Banker. Most loans get denied due to ignorant underwriters with a lack of tax return knowledge. Meaning they do not have a degree in Taxes and know very little about being a proper CPA/Tax Accountant. I have seen thousands of deals over the years get denied because an underwriter does not know what a "Pass Through Company" is and why its used. I have also seen UW not use (1X) one time losses as a waived loss and add it to the negative income.

One UW will allow you to average and one will tell you it cannot be averaged and you end up with a great current years income getting destroyed!

If I could waive a magic wand I would change all loans to 100% financing if the property has ARV potential or the rents debt service in all occupancy scenarios! Then build in an Escrowed PMI that builds up over time to cover preventive maintenance losses. Build the PMI into the loan as the borrowers money same as escrow and it stays out of a 3rd party's hand and is used for emergency cases. Could refund on refinance or after a certain year mark you could add to the principal balance once below risk.

What this solves is more Aemricans owning REI and not having to drain their own savings to buy a home just to cash flow enough to make back the down payment in 3-5 years. I would encourage to look at Military VA 100% financing loan defaults (Not as high as FHA 3.5% Down, why> Because lower rates, No PMI and they Do Not have to deplete their savings, 401K's, IRA's just to buy a house and when something happens as life does, you can use those accounts to play catch up versus given to the bank!

[email protected]727-637-4289
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  • G. Brian DavisPro Member
    Investor · Hatboro, PA · Member since 2016 · 3k+ posts · 884 votes
    1mo

    The more deals you do, the more you realize how important the boring stuff is. Good documentation, good processes, and good communication can prevent a lot of problems later.

    From an investor standpoint, I want to know that the people handling the money have a consistent process and aren’t just relying on relationships or memory.

    A lot of real estate problems don’t come from the big decisions. They come from the small things that weren’t verified or documented along the way.

    1Reply
    • Kate Porter
      OP
      Investor · Beverly, MA · Member since 2017 · 23 posts · 7 votes
      3w

      Thanks, Brian. This is really helpful. When you’re reviewing a file, what are the things that tend to require the most back-and-forth or additional digging before you feel comfortable with what you’re seeing?

      0Reply
  • Jason WrayPro Member
    Banker · Nationwide · Member since 2020 · 2k+ posts · 1k+ votes
    1mo

    Kate,

    As a 20 Year Veteran being on both the Owner/Lender side and now as an FDIC Banker. Most loans get denied due to ignorant underwriters with a lack of tax return knowledge. Meaning they do not have a degree in Taxes and know very little about being a proper CPA/Tax Accountant. I have seen thousands of deals over the years get denied because an underwriter does not know what a "Pass Through Company" is and why its used. I have also seen UW not use (1X) one time losses as a waived loss and add it to the negative income.

    One UW will allow you to average and one will tell you it cannot be averaged and you end up with a great current years income getting destroyed!

    If I could waive a magic wand I would change all loans to 100% financing if the property has ARV potential or the rents debt service in all occupancy scenarios! Then build in an Escrowed PMI that builds up over time to cover preventive maintenance losses. Build the PMI into the loan as the borrowers money same as escrow and it stays out of a 3rd party's hand and is used for emergency cases. Could refund on refinance or after a certain year mark you could add to the principal balance once below risk.

    What this solves is more Aemricans owning REI and not having to drain their own savings to buy a home just to cash flow enough to make back the down payment in 3-5 years. I would encourage to look at Military VA 100% financing loan defaults (Not as high as FHA 3.5% Down, why> Because lower rates, No PMI and they Do Not have to deplete their savings, 401K's, IRA's just to buy a house and when something happens as life does, you can use those accounts to play catch up versus given to the bank!

    [email protected]727-637-4289
    3Reply
  • Robin SimonBusiness Member
    Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
    1mo

    "When a loan gets reviewed by a warehouse lender, investor, or another downstream party, what tends to get questioned or kicked back?"

    This is very nuanced and important and a cause of a lot of issues and misunderstandings in my experience. "Private Lending" tends to merge "DSCR Loans" and "Hard Money Loans" and the level of TPR (third party review) and/or the warehouse lender/loan buyer review and documentation process is VERY DIFFERENT depending on loan type and lane you are in.

    [email protected]
    Harpoon Capital515 Reviews
    WebsiteView Page
    1Reply
    • Kate Porter
      OP
      Investor · Beverly, MA · Member since 2017 · 23 posts · 7 votes
      3w

      Thanks, Robin. This is really helpful. Are there any parts of the diligence process that stay pretty consistent regardless of the type of loan or borrower?

      0Reply
  • Erik EstradaBusiness Member
    Lender · Member since 2022 · 6k+ posts · 1k+ votes
    3w

    Whenever I review a file I always check for the following:

    1. When was the LLC created? Is there any new member that recently got added on? Are they our PG?

    2. Is there a layered entity? Who is the warm body PG?

    3. Is the PG on all state filings? EIN Letter, Articles of Incorporation are a dead giveaway

    4. When was the OA signed and when was the entity filed?

    5. Is the tenant related to any of the members on the LLC?

    6. Is the company in good standing?

    [email protected]818-269-7983
    LuxePrivate Investments LLC 572 Reviews
    WebsiteView Page
    1Reply
    • Kate Porter
      OP
      Investor · Beverly, MA · Member since 2017 · 23 posts · 7 votes
      3w

      Thanks, Erik. This is really helpful. Of the things you mentioned, which ones tend to uncover something you actually need to investigate further?

      0Reply
  • Juan Hasbun
    Lender · Fort Lauderdale, FL · Member since 2020 · 29 posts · 4 votes
    1h

    As a private lender, I'd actually say this is one of the more thoughtful posts I've seen on the topic.

    A lot of what you've listed is exactly where the real-world friction lives. The interesting thing is that the challenges are usually less about identifying outright fraud and more about reconciling data that should match but doesn't.

    A few observations from my experience:

    What gets manually checked most often?

    • Entity information against state filings

    • Ownership percentages in operating agreements versus loan application disclosures

    • EINs, formation dates, and authorized signers

    • Bank statements and proof of funds

    • Title commitments and vesting

    • Insurance requirements and lender loss payee language

    • Settlement statements and closing documents

    The goal isn't necessarily to "catch" someone. It's to make sure the same borrower, entity, property, and transaction details tell a consistent story across every document in the file.

    What causes us to stop and investigate? Usually it's not a major red flag. It's inconsistencies.

    Examples:

    • An operating agreement shows different ownership than what was disclosed on the application.

    • Bank statements don't support the liquidity represented.

    • The borrowing entity name differs slightly across documents.

    • Insurance is issued to the wrong insured.

    • The title commitment doesn't match the intended borrower vesting.

    • Rehab budgets, contractor bids, and draw requests don't align.

    Most of the time these issues have perfectly reasonable explanations, but somebody has to stop and connect the dots.

    Where does the most back-and-forth happen? In my experience:

    1. Entity documents

    2. Insurance

    3. Title

    4. Source of funds/liquidity verification

    5. Conditions right before closing

    The challenge is that each item may involve a different party: borrower, attorney, title company, insurance agent, processor, underwriter, or capital partner.

    What gets kicked back by warehouse lenders or investors? Generally, documentation quality and consistency.

    Not because the deal is bad, but because an investor reviewing a file later wasn't part of the original conversations. They only have the file itself.

    Common examples:

    • Missing signatures

    • Stale documents

    • Unresolved conditions

    • Inconsistent borrower/entity information

    • Missing evidence supporting exceptions made during underwriting

    • Incomplete insurance or title documentation

    A lot of secondary reviews boil down to: "Show me where this was documented."

    What still happens outside the LOS? Quite a bit.

    Even lenders with strong LOS platforms often have critical workflows happening in:

    • Email

    • Excel

    • Shared drives

    • PDF markups

    • Title portals

    • Insurance portals

    • Bank statement review tools

    • Internal checklists

    The LOS is frequently the system of record, but not necessarily where the work itself gets done.

    If I could eliminate one tedious process... It would probably be document reconciliation.

    Not collecting documents. Reconciling them.

    The same borrower information gets entered, reviewed, validated, and compared over and over across dozens of documents and counterparties. A surprising amount of lending operations is making sure everyone is referring to the same borrower, same entity, same property, same ownership structure, and same transaction.

    My advice as you pressure-test your idea: don't focus on fraud. Most lenders don't spend their entire day finding fraud.

    Focus on exceptions, inconsistencies, and document reconciliation.

    That's where teams lose hours. That's where conditions get generated. That's where closings get delayed. And that's where warehouse lenders and investors tend to start asking questions.

    If you're hearing the same themes repeatedly in your conversations, you're probably closer to a real problem than you think. The biggest opportunities I've seen are usually not in replacing underwriting judgment, but in reducing the manual work required to validate that all the information in a loan file agrees with itself.

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