Selecting a lender can be a difficult process if you don’t know the right questions to ask. This post features 5 questions to ask when looking for the lender in NE who is right for you!
At times you may feel like you are begging for money, but remember that you are the customer and these lenders only make money if they close loans. They are competing for your business and you have a wide variety of lending sources available.
Keep in mind that commercial lending if much different than a traditional qualified mortgage for a home you plan to live in. These tips will prepare you to navigate those differences.
Q: What are Your Terms, and Are There Additional Fees?
The first obvious question, after “will you fund my loan?”, is what are the terms. This includes the interest rate, the LTV (Loan to Value), and the number of points you will be paying (if any). Also, always ask if there will be any additional fees. These can be legal fees, underwriting fees, administrative fees, etc.
Fees can turn a great loan into a disaster if they are not accounted for in your budget. Also, ask about any prepayment penalties and interest rate resets (some commercial loans will reset the interest rate every 5 years or so).
Q: Do You Have Property Criteria That Must Be Met?
Many lenders will focus on geographic areas, communities, and types of properties. Ask about any limitations on the type of property you are able to purchase. Some lenders are prohibited from lending on a home you plan to live in. Make sure you fully understand what types of properties the lender will allow you to buy.
For example, if you are considering a two-bedroom rehab, but the lender requires 3 bedrooms and a price point of 250k+, you might be out of luck. That’s why it’s important to discuss your deals with multiple lenders.
Q: Do You Provide Funds For Rehab?
Nearly all lenders require you to have some of your own money in the deal. Be sure to ask if your repair budget counts toward that goal or if repairs are outside the loan. Some will provide a separate rehab loan. Some will fund purchase and rehab? You may also find it helpful to split a project between two lenders; one for purchase and the other for rehab. The terms for these two components will vary greatly among lenders and can turn a good project into a hungry hippo that eats your profits.
Q: Are Your Loans Flipped After Origination?
Many companies will sell the loan to a 3rd party after the loan has been originated. This means that there is a possibility that you will be working with a yet to be determined 3rd party. If they flip the loans, you will be making payments and working with a different company once your loan has been processed. That may be okay if everything goes according to plan, but a community bank that keeps loans in-house will have more flexibility later on. They will also be more committed to the relationship because your success will directly impact their own.
Q: What is Your Experience With Loans Like This?
There are some lenders and banks that make dozens of rehab and investment loans each week. If they understand your business and know what deals make sense, they are more likely to provide you with reasonable terms. They will understand the risk and be able to help you maximize your profits. Some lenders even offer to evaluate deals to help you find the best structure.
As with any decision in real estate, it’s important to know all of your options and shop around. Even if you have a great relationship with your lender, work on developing backup relationships in case their lending guidelines change. Remember to ask questions about ANYTHING you are uncertain about.