7 Questions Real Estate Investors Should Ask When Selecting a Lender
Below are several tips I learned when researching lenders for my investment business.
The 7 tips could be explained in much greater depth but for purposes of keeping this blog short and to the point, I’ll be brief about each point below!
I may create a future podcast episode going over them as well. Feel free to reply with any questions or on social media.
Question #1: What are your terms?
Usually a lender will look at Loan to Value, how much a loan is compared to the total purchase price, and it ranges often from 70% to 80% of the value of the property.
Lenders don’t like 100% funding due to risk of default by the borrower. You’ll have to come up with 20% to 30% of the down payment.
Interest rate and Points are other factors to ask about. Points are upfront fees paid for the lender originating the loan for you.
Question #2: Are there any additional fees outside of interest and points?
Some additional fees lenders may charge are underwriting, documenting, legal, etc. Compare lender fees as this can make a difference in how much your loan costs you.
Question #3: What are your loan and property criteria?
Some lenders only fund certain property types or price ranges. For example, some lenders may deal with more expensive commercial properties and will reject smaller loans for single family homes.
Question #4: What does the loan timeline look like?
How fast can the lender turn around a loan? Usually when you get a property under contract to purchase, closing takes place 30 to 45 days later and due to recent law changes it is likely 45 days now in most purchases.
This is to give lenders and purchaser’s time to draw up a loan and make sure the buyer is aware of all the terms before closing with the seller.
Seller’s like buyers who can close quicker so if a lender’s timetable is too long it may put you out of a deal.
Question #5: Do you provide both recourse and non-recourse loans?
Non-recourse loans are best for investors as the borrower can only go after the asset that the loan is collateralized by.
If the value of your property falls below the loan amount due and you stop paying your loan, the borrower can only go after that property and has to take a loss.
They can’t come after your personal assets to fund the remaining difference.
Question #6: Does the lender provide funds for rehab costs?
If you’re an investor pursuing deals that need quite a bit of rehab and can’t fund the repairs yourself or wish to include it in the loan to add leverage and higher returns, then see if the lender offers additional capital towards the repair costs.
You’ll have to document the expected costs to show the bank. For home owners, there is the FHA 203(k) Loan but that’s for another discussion another time. Research it if you’d like.
Question #7: How knowledgeable are you on the projects like the one I’m working on?
As an investor you want to work with lenders who are investor friendly and have experience doing transactions with investors.
Some commercial lenders are easy to work with as they often create loans for apartment investors and commercial investors.
They may be able to get you lower interest rates, charge fewer points, move quickly, etc. because they can recognize an investment deal that is a good deal and has lower risk for a loan default.
So I hope these 7 tips on questions to ask lenders you are interviewing to build a relationship with helped. Finding the right lender to add to your team will be important to your business operating smoothly and less costly.
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