You’re probably asking yourself, “Why should I care about the private money loan process? If my deal closes, does it really matter?” Well, since we have an article on it – yes, yes it does. Understanding and closely following your private money loan process will put you in a much better financial position. It’s very different from banks. Hey, speaking of banks:
First, a look at banks
When working with a bank, for many of us it doesn’t feel necessary to understand all the steps involved in closing a loan. The bank gives you a yes or a no on your deal, you choose to accept their rates or not, and head to close. You have very little influence on this process and its outcomes.
The bank employee you work with through the process – the loan officer – is more of a coordinator rather than decision-maker. The loan officer’s primary role is on the front-end of the transaction. Taking the application, discussing loan programs and their qualifying criteria, and gathering the income and asset documentation from the you are most of their responsibilities. The loan file is then passed on to processing, underwriting and closing staff that see it through to settlement. Funding sources are provided to the loan professional by the bank.
It’s a different experience with private lenders
For private lenders, the front end of the private money loan process is just the tip of the iceberg. These highly skilled entrepreneurs orchestrate the entire transaction from start to finish and in some cases are funding hard money loans with their own cash. While they may resell your loan quickly to a private investor to liquidate their funds, their skills and relationships with funding sources is vital to providing you with the hard money loan to fit your needs.
Understand the private money loan process to influence the outcome
Knowing the inside track of how you and the private lender will go from your initial search to making loan payments will give you valuable tools to:
- Assist the process in going smoothly.
- Predict and mitigate potential issues.
- Negotiate a better deal.
- Protect yourself by understanding what is normal to private lending and what is not.
You cannot do any of these things well if you view the loan process as a black box. Even more so because (and we really can’t say this enough) each private lender will be different from the next. You will be working with people and small businesses with unique, oftentimes personalized loan products and operational practices.
Here is the loan process if you don’t look beyond your immediate experience:
- Find the lender.
- Provide the information the lender requests.
- Qualify for one of their loan products.
- Negotiate your terms.
- Review the loan contract.
- Receive your money and start paying the bill.
Simple, right? Just seven steps!
From the private lender’s perspective, you’ll see much more nuance:
- Find the private lender. Meanwhile, the lender:
- Decides to work with you.
- Determines and asks for the information they need (application, income, credit, asset documents and more).
- Complete the application and provide the information the lender requests. Meanwhile, the lender:
- Provides you with applicable federal and state disclosures.
- Researches completes due diligence on you and the subject property.
- Pulls all information into a loan package and determines the appropriate loan product.
- Gathers and reviews title information, payoff/loan reinstatement, appraisal/other asset valuation as needed.
- Shops your deal with private investors for their preliminary approval, if and as needed.
- Provides you with preliminary decision, product, and contract terms.
- Qualify for one of their loan products.
- Negotiate your terms. Meanwhile, the lender:
- Works with the private investor to reach agreement between all parties (you, lender and investor).
- Revises any terms as needed.
- Coordinates title and escrow services.
- Underwrites and approves the file.
- Creates the final loan documents.
- Coordinates funding with you for the loan settlement (closing)
- Review the final loan contract.
- Close. Meanwhile, the lender:
- Begins loan servicing or set it up with the loan servicer.
- Coordinates with the escrow/title company will file the appropriate documents to be recorded with the county.
- Receive money and start paying your bill.
- Lender or private investor chooses to keep the loan on the books or sell the note to another investor.
The lender will personally manage most of these processes (often completing several in tandem with each other), making the fact that many lenders can move from step one to seven in as few as seven days even more amazing.