What to espect from a private mortgage lender with regard to loan-to-value, property income potential, exit strategy, and private lender's property interest.
A private mortgage lending program is essential to the success of your real estate investment business and your business relationship with the lender during the life of the real estate loan. For many real estate investors, working with the right lender means the difference between a sweet deal and a deal gone bad.
Many real estate investors opt to work with private mortgage lenders to escape the bureaucracy involved with the conventional lending process. The global real estate market is competitive and often the speed of the transaction is crucial to the success and outcome of a real estate deal.
Loan-to-Value: Private mortgage lenders are concerned with loan-to-value (LTV) ratios which is the calculated percentage of the requested mortgage to the total appraised value of the property. When working with a private lender, you will want to learn what their criteria are for lending when it comes to the loan-to-value ratio. This will vary depending on the type of real estate investment you are seeking to finance.
For instance, a private mortgage lender will typically lend a lower percentage on raw land and a higher percentage on a multiple unit property that produces cash flow. If the property and the borrower meet the criteria of the lender, they will be more likely to lend the maximum percentage. If the deal is considered less than ideal, the percentage of the loan will be significantly lower.
Private Lender Property Interest: It is important to find out the property interests of the lender with regard to the type of property they would most likely be willing to fund. Typically, the private lender would be interested in a property that is easy to sell if the borrower lands in default. This would most likely be a property that produces cash flow as opposed to a non-income producing property such as raw land.
Property Income Potential: Another consideration of private mortgage lenders is how much emphasis they place on the income potential of the property being considered for financing. Some private lenders insist on a property that provides sound collateral because this adds a great deal of security to the loan. Also private mortgage lenders may consider cash flow from your other existing properties as a substitute.
Exit Strategy: To be sure to keep your private lender happy and hopefully doing business with you on new deals it is very important to a repayment strategy. Private lenders will evaluate whether or not the plans for repayment by the borrower are feasible or questionable. For example, if the borrower plans to satisfy the debt by obtaining another mortgage, the private lender will need to consider the credit history of the borrower.
Decision Making Process: You can expect the private mortgage lender to use a similar decision making process to a conventional lending institution when considering you as a borrower and the property you are financing. The nice part is the private lender may fund a venture that the conventional lending institution would refuse and will provide creative methods when it comes to repayment terms.
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