Five Factors That Private Lenders Consider When Underwriting a Property

Private lenders have different rates, fees, and leverage.

Every lender has to analyze deals by assessing how much risk they are taking on.

Let’s check out five factors that private lenders consider when offering you a quote, underwriting a property, and making a final terms lending decision.

#1 Credit score

A borrower’s credit score is crucial, as it’s a common sign that they will be able to pay the loan back.

While a lower score won’t disqualify a potential borrower, it will affect the cost of financing.

Lenders can be more lenient with borrower’s with higher credit scores. A lender is taking on more risk with a borrower with a lower credit score.

That isn’t necessarily a bad thing.

Ask your sales rep if they’ll do a hard credit pull and how credit score will affect the interest rates, fees, and leverage offered.

#2 Character

Once the loan application is complete, your lender will do a background check.

Keep in mind that certain issues could arise if you had legal troubles.

Lenders will ask if you’ve had any bankruptcies, judgments, existing tax liens, or foreclosures.

White-collar felonies and/or Class A misdemeanor convictions will disqualify potential borrowers from receiving a loan.

However, there are exceptions. If you were previously convicted or charged with a felony or misdemeanor, please give a detailed explanation in your application.

Lenders could work with you if the crime occurred decades ago.

Different lenders have different policies, so you might as well ask!

#3 Credentials

A potential borrower’s real estate experience could affect the rates, points, cost, and types of loans offered.

For example, a builder with 20+ years of experience would be able to get lower-interest rate financing for multiple town home construction.

However, a first-time fix and flipper might get a higher interest rate for doing a small $15k flip.

The big difference here is risk.

Lenders are more comfortable giving a better interest rate to an experienced candidate. Once you get more deals done, lenders can be more flexible and would be more comfortable to give you a lower interest rate.

Some lenders can mitigate risk by not even offering certain types of loans to beginner investors.

For example, lenders may not offer new construction loans to someone who has never completed a new construction project before.

If you’re a beginner, be sure to ask your lender what types of loans are available.

#4 Cash

Private lenders generally require borrowers to bring some cash to the closing table.

You might be asking to show a proof of funds, which is normally a bank statement or other proof of income.

You show this to the lender before they can underwrite the loan.

The more cash that a borrower brings to closing means less risk for the lender.

Some lenders could provide a reduced interest rate if you offer to bring a significant amount of cash to the closing table.

There are a few factors to consider, so it never hurts to ask!

#5 Collateral

The underlying value of the home or lot that’s securing the loan is known as collateral.

This is a huge factor that lenders consider when underwriting a real estate deal.

Lenders need to know that their principal (amount that the borrower will borrow) is protected.

A great lender can provide you Return on Investment (ROI) information on your deal. Many lenders can offer at least preliminary numbers during your first phone call with just a few details about your deal.

Keep in mind that it’s important for borrowers to understand how certain criteria could affect loan availability and the cost of financing their deals.

When looking for a lender, be ready to discuss these items as proper information will provide you with an accurate quote.

This will help you make a great decision when it comes to getting funding.