How private lenders evaluate deals: your credit and capacity

When it comes to how private lenders evaluate deals, two important factors are your credit and capacity. Your credit and capacity include evaluating:

• Your borrowing history. This includes your credit score and credit history.
• The current factors in your life that may contribute to the likelihood of you defaulting on the loan. This includes your debt to income ratio, your income stability, your experience in the kind of project for which you’re using the money, etc.

While private money will cost more than banks, as with any loan you should expect to pay even more if your credit history or current financial circumstances look risky on paper.

If you know you have bad credit or your current circumstances look a bit shaky on paper, the best thing you can do for your chances is be honest and direct about it. Private lenders understand it’s the nature of the business they’re in, and they’re very good at solving problems (and have most definitely seen worse).

If you can offer an explanation that helps mitigate negative factors, absolutely provide that to the lender. If a lender has a solid basis for believing that these issues will not affect your ability to repay the loan, it can go a long way toward helping your costs.

What they get if you don’t pay: your collateral

Private lenders will use a combination of the following methods to determine what your subject property is worth:

• Appraisal
• Broker price opinion
• Automated valuation model
• Personally visiting the property and surrounding neighborhood

High-impact information may never come to your attention through normal valuation processes. There is no substitute for research that reveals current or future circumstances that can dramatically affect your investment and chances of getting a loan. This process is called using multiple points of value.

Beyond that, after the lender has determined your collateral’s value, they will weigh it against your other loan factors to determine the loan to value they are willing to extend. And always remember: how private lenders evaluate deals will change from lender to lender. Just because one lender thinks your deal is a bad bet, doesn’t mean the same is true for all. If you do find yourself running in the same issue over and over, ask what you can do to resolve it. You may also be able to add something to the deal to sweeten the pot, so to speak. How private money lenders in Washington DC evaluate deals can change with a little negotiation.