Updated: Jun 2, 2020
Asking the right questions is key when borrowing money from any lender. Obviously, it will allow you to make the most informed decision. But it will also demonstrate a lender’s transparency. Conventional lenders are legally bound to fully disclose rates, costs, and terms by the Truth in Lending Act (TILA) and other laws. Private or hard money lenders are still prohibited from defrauding borrowers or charging usurious rates, but they are not necessarily bound by laws designed to protect individual consumers, if lending to entities.
The law assumes that entities transacting business are sophisticated enough to perform their due diligence. Your LLC wouldn’t simply buy a property because a wholesaler said it was a good deal, right? It’s the same when borrowing cash: it isn’t just about the price. So asking questions about loan terms is as important as asking lenders, “what are your rates?”
It should go without saying that you need to know when and how often loan payments are due, how long you have to repay the borrowed funds, if there is a minimum credit score requirement, and will the lender finance any necessary rehab? Beyond these basics, are Green Block’s Top 10 most important questions to ask a private or hard money lender about their terms:
1. Does the lender require collateral?
2. Does the subject property have to be collateralized or can you substitute a different one (if you like)?
3. Are loans based on as-is value or After-Repair Value (ARV)?
4. Will you be personally liable if you default? Or just your entity?
5. What is the maximum Loan-to-Value ratio (LTV)? This determines how much of your project a lender will cover. Most lenders will not write a 100% LTV loan.
6. How are rehab funds provided? Upfront? Via draws? At the end of the project?
7. Does the lender require an appraisal, inspection, or both?
8. What kind of documentation is required (tax returns, bank statements, references, etc…)?
9. How much insurance coverage is required?
10. Are reserves required at closing? If so, how much?
BONUS: How quickly can you fund and close this loan?
Do you think there is a more important question besides “what are your rates?” that we missed? Please let us know in the comments.