Traditional lenders are not ideal if you are an investor looking for flexibility and leniency. If you don’t meet all of the criteria and jump through all their hoops, not only do traditional lenders not want to grant you a loan, they simply can’t due to all of their strict regulations. That is where alternative lenders come in.
According to Scotsman Guide:
Conventional banks, for example, would not even consider providing funding to an individual with a past criminal conviction. That would likely be the case even if the borrower was not convicted of any type of financial fraud and had done prison time for an unrelated transgression that has no impact on the real estate offered as collateral.
Hard money lenders, however, would consider financing for such an individual, because they are willing to focus on the hard asset and lend based on value — even for borrowers with no income verification or other credit challenges. Depending on the type of real estate, hard money lenders may lend anywhere from 50 percent to 75 percent of the value — typically 50 percent for land deals, and as high as 75 percent for income-producing properties, such as multifamily, retail or office.”
For alternative lenders, it is all about the entire financial picture. A bad credit history can be overlooked if the borrower has the capital to pay the interest on the loan.
It is important to know what attributes of a lender are most important to you before getting involved.
Here are the key questions to ask according to Scotsman Guide:
- Does the relationship between the lender and its capital sources allow for lender discretion in selecting loans for its portfolio, or is it a requirement that the capital sources have a final vote?
- What is the underwriting process and what information will be required before a decision can be made?
- Who makes the ultimate decision on whether or not to proceed with a loan?
- What law firm will the lender use to document and close the loan?
- Is the lender going to be managing and servicing the loan after closing?
- Can the lender provide references and samples of similar transactions?
- Will the loan be securitized or sold?
An important aspect of alternative lenders is that they can offer flexibility, liquidity, and partnership. Unlike traditional lenders, alternative lenders can offer partnership and communication in your investments and projects.
According to Treasury & Risk, “Borrowers can distinguish forward-thinking lenders from the old guard by looking at whether prospective lenders value open, two-way communication. Borrowers should look for a lender that truly views the lending relationship as a partnership in which both parties are responsible for maintaining transparency and clarity about their objectives.”
When you are investing in real estate, you’re not just looking for financing, you are looking for a lender who value open, two-way communication.