What are some questions one might encounter when asking a private lender for a loan?

@Carlos Cuervo

Hi Carlos,

Below are some sample questions that a lender would typically look at when evaluating a deal/borrower. Please note that when you are working with a private lender, the process is inherently subjective, and so there can be significant variability in terms of what preliminary questions are asked/how the lender interprets specific answers.

Deal:

-  Where is the property located? All lenders are more likely to loan on properties in highly populated areas with good market velocity (properties sell quickly).

- What is the as-is value of the property? Some lenders have LTAIV (loan-to-as-is-value) restrictions.

- What is the total amount of debt/encumbrances on the property? Relatively few lenders are willing to take the 2nd position on a property, and typically like other debt/encumbrances to be cleared off before they lend.

- What is the purchase price of the property? Some lenders will lender on the lesser of as-is value and purchase price, so it is important to keep both numbers in mind.

- What is your construction budget? What is the scope of work? Lenders will want to see how much work you are doing on the property ($ amount), and also what you are doing to the property. Lenders are more comfortable if you have experience doing similar projects.

- What is the ARV (after-repair value)? This will often be used to dictate your total loan amount. For example, a lender might be limited to 65-70% of the after-repair value of the property per his/her individual appetite for risk.

- What is your exit from the loan? Sale or refinance. Are you going to be selling the property? In this case, the values of the surrounding properties that have sold recently become quite relevant. Are you going to be holding onto the property? In this case, the lender will want to be sure that you can procure long-term financing, so things like your credit score, and the DSCR of the property become more important.

Borrower (You):

- What liquidity do you have available? This will be used in part to cover the project costs that the lender won't cover. For example, if the lender covers 85% of the total project costs, you will be responsible for the remaining 15%. Additionally, you will need to pay interest on the loan, and having liquidity is a good indicator of whether or not you will be able to make payments, at least in the short-term. 

- What is your credit score? This lets the lender know your history of repayment, and if it is higher, then a lender becomes more certain that you will repay his/her loan.

- What experience do you have? Generally speaking, the closer your experience is to the project at-hand, the better. When you start to move away from the type of experience you have had, lenders become less certain that you will be able to pull a project off.

The above list is by no means exhaustive, but is a good starting point regarding the kinds of questions that a private lender would typically ask.

Hope this helps,

Michael