How to Vet a Private Lender

20 Replies

Hi All,

I've been shopping around for portfolio loans to refinance some of my rental properties.

I was contacted by another BP member who has has private lenders who said he and his partners can help me refinance - his rates are a bit better than what Ive been finding.

It's easy enough on his end to look see my credentials via credit checks - how do you vet a lender to know if they're legitimate?


@Johanna R. How about getting client references? Think of it as you hiring an employee and you need to vet that employees'past performance.


If they have made any loans in the past, the county should have a public record of a Deed of Trust for each transaction.  That document will have the lender's name on it.

I would ask for examples of past deals.  They usually are more than happy to share that information.  The better private lenders even use past deals to advertise how pervasive there reach is.  If you are working through a broker for private lenders, they will be less enthusiastic to share the lender's details unless you sign an agreement to go through the broker and not go to the lender directly. 

As a private lender, I am much more interested in vetting a borrower than you should be in vetting a lender.  The lender takes on the majority of the risk when they lend their funds and borrowers are too eager to blame the lender when their deal doesn't turn out as they planned.  

As long as this lender is not asking for fees up front without performing, and their rates seem reasonable, and you can both make money on the deal, I would suggest you stop shopping and get it done!

I am confused. Are you saying someone is offering to fund your deal and you won't take their money unless you can run a credit check on them? If the terms are to your liking what possible difference could the credit history of your lender make? You will know their funds are good once they hit the escrow account. It is the lender who is taking the risk. Once you have their funds they are dependent upon you executing your deal well and being honest to get them back.

I don't even run credit checks on my borrowers. If someone asked me to show them my credit history before funding their deal I would probably just laugh (on a good day). I would certainly not do business with someone like that. I can only imagine the legal difficulties that could result if the project doesn't go as planned and that was the way it started.

@Neil Aggarwal , I have funded ~50 deals. Most of them have been through my self directed IRA or my wife's Solo 401k. My name doesn't appear anywhere on the documents for the deals funded through the SD-IRA, only my account number. On my wife's deals the only name appearing on the mortgage is that of her trust account.

Originally posted by @Jeff Rabinowitz :

You will know their funds are good once they hit the escrow account.

I think the original poster is worried the private lender will promise them the world and then find out at closing that the deal is not what they discussed.  Another problem may be that the lender never wires their funds to the title company.  These are all legitimate concerns.

The key is if you are talking to a middleman person collecting points. Sometimes that person can be in on a scam and other times they are just an innocent bystander thinking they are working with a reputable lender.

The rate they are telling you means nothing  at all until they underwrite the property and the borrower and lock the rate.

If they are asking you for upfront non-refundable you should have big caution. How you vet depends on if this is a regular lender or a private individually directly funding.

Jeff on your IRA funding what are you averaging per deal loaning out amount wise and what rate are you getting??

If IRA lending is small amount and they want close to hard money rates then I do not see an advantage to suing those funds. If the rate was between a bank rate and hard money then I could see it making sense.

@Johanna R.

You may want to look to self-directed solo 401k and self-directed IRA investors for funds. Promissory notes are popular IRA and solo 401k investments.

"The lender takes on the majority of the risk when they lend their funds and borrowers are too eager to blame the lender when their deal doesn't turn out as they planned."

On the other hand, @Johanna R. , a great many lenders can't/won't perform. We get a substantial amount of business from last minute borrowers whose lender flaked out. The name of the game in this arena is to keep your money at work and unfortunately, one strategy is to promise the world and then pick and chose who you want to close with as your money becomes available. We see this with even some of the larger HML's in our area and it does nothing more than give the business an awful reputation.

The first question all potential borrowers ask is what are a lender charges (interest, points, etc.). Understandably, they focus on cost. After being screwed a time or two, experienced borrowers ultimately want to know is how fast the lender can close, are they reliable, reputable, and honest. Realistically (and unfortunately), the only way to find these out is to work with the lender and then often it's too late.

Unless your loan is from your Aunt Agnes, most lenders in an area will be reasonably cost competitive. Assuming your deals are viable, a point or percent one way or another shouldn't matter.

Most, but not all states require a lender to be licensed. You should be able to go to your state's licensing board to check credentials if that's all you are asking. On the other hand, the title here asks how to vet a private lender. Here's a list of questions, copied from this thread, that might be useful:

  • Annual interest rate
  • Points
  • Fees
  • LTV and how it's calculated (based on ARV or purchase price or ?).
  • Duration of the loan
  • Can I make all payments at the end?
  • Requirements for a loan extension
  • As a lender, how do you comply with our state's licensing and usury requirements?
  • How much time to you need to fund? How fast can you fund?
  • Where do you get your loan docs and have they been reviewed by an attorney (hopefully a lending attorney) -- shows professionalism.
  • What documents will you require from me.
  • Specific property types you will or will not fund.
  • Will you fund both the purchase and rehab money? Terms?
  • Where do you get the money to lend? Do you sell your notes (i.e. will you be my lender throughout the entire project)?
  • Can I have a copy of your note for my review?
  • Under what terms have you ever backed out of a loan.
  • What haven't I asked that I should know?

"As a private lender, I am much more interested in vetting a borrower than you should be in vetting a lender."

Nonsense. This is your business to protect, Johanna. Never let anyone tell you that they have more to lose than you.

Thanks for the specifics Jeff S Na.  I am in the process of finding a private lender for my first deals and I had the same question.

@Jeff S. this is really great! Thanks for that post. 

I too am like Joahanna. This is my first time working with a private lender. He's asking for 600.00 up front for Mortgage certificate. He then said he would have his attorney draw up the contract. Also wanted me to send him the funds visa western union union or money gram. When I said I didn't feel comfortable doing that he gave me banking information but the name on the account is for someone else. Became weary as it sounded like a scam. The approval process was extremely easy. 

@Pilar Tobias , Western Union is a legitimate company, but no legitimate lender uses them. Never pay upfront fees. Yes, there are charges to obtaining a loan, but they are paid at the closing table. Happy to hear your scam-meter was up and running. 

Thanks for your response Mindy. It sounded too good to be true. 

Wait a minute! Cogo Capital and Ridge Lending Group both charged me application fees upfront of almost $200 each. They are both well established BBB lenders. So I'm not sure the prepayment indicates a scam unless it is oddly high like $500.
Anyone got more thoughts on this?

@Jay Statzer  they are not private lenders they are well established lending companies.

when folks think private lender they think of you and me wanting to lend our personal money.

what you get when say you want private money is a bunch of scammers hitting you up with their list of private lenders and of course you can have access to them for 500 bucks or more.. those are the scams.

Sorry, but I really disagree with the advice and definitions here. We have Private Lenders, Hard Money Lenders, Conventional Lenders, and now somehow there are "well established lending companies?" And, it's ok to send them money up front?


A junk fee is a junk fee is a junk fee. Whether the lender skips out 30 second after receiving your money or you actually get a loan, there is no reason to pay these. You get nothing extra for paying junk fees, up front or not, and they can easily be avoided by finding a more competitive lender.

The playing field for private/hard money lenders (which are the same) is extremely aggressive. Find your lenders at local real estate clubs, face-to-face. Obtain references from them and from others in the room. Call these individuals. Meet your lender with a prepared list of questions and be ready to answer theirs. Prove to them you have the ability to make money and pay them back. This is a business based on relationships that just can't be developed online.

(The BBB has been debunked a thousand times. Pretty much, anyone who pays their fees on time can get an AAA rating.  This is not criteria for finding a credible lender.)

As usual, I'm totally with @Jeff S. on this.  

Your best source of reliable lenders is local word of mouth referrals from people who have actually closed deals with them.  Ask around at your local real estate groups, and ask if they know anything about their reputation.  It matters.   Some lenders are known to change the terms at the closing table, add in back-end fees, or refusing to close after hefty front end fees are paid in advance.  The best way to avoid this is to get local references from people you know and trust.

As to what a lender calls themselves:  hard money, private money, lending company, whatever.  It's all marketing, nothing more.  Private lender sounds less scary than hard money lender. 

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