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To put it plainly and simply, mortgage originators can make a ton of money in today’s
marketplace by connecting real estate investors with private-lending financing. Yet
this idea still comes as a surprise to many industry professionals who are often hurting for business, even when asked if they have ever considered expanding into the
world of private lending.
So why should you consider private lending? Because it continues to succeed despite the new rules and regulations, and the originators who tap into this financing
option can take advantage of a new profitable stream of income, while providing
their clients better lending options.
Where to start
In general, private lenders are typically more flexible than big banks, giving you more
funding options for your borrowers, but it is important to find a reputable private
lender long before a client needs one. The key to success is to first establish a relationship with a private lender. This can be a real game changer.
It also is important to understand that private lender’s specialty and familiarize yourself with the lender’s products and processes. No lending scenario is ever the same,
and as a mortgage originator you act as the liaison between the lender and your client. Private lending provides myriad options to create innovative financing solutions,
so you need to figure out which products are most beneficial for your borrowers.
Say you want to focus on investors that own a mix of properties and are just looking
to add to their long-term portfolio, for example. Or, you want to work with investors
that want to buy properties to fix and flip them in the short term. These borrowers will
need different lending programs.
Next, you need to know how to qualify your borrower: Some clients may have a lot
of cash on hand, while others have very little, but have great equity. Different scenarios can work depending on the lender. It’s all about working with that borrower to
find the right solution for a private loan.
The bottom line is you need to understand a lender’s niche beforehand. Only then
can you work with your borrowers to find the right solutions and guide them through
the origination process.
Private lending excels in two areas: speed and flexibility. Many private lenders pride
themselves in being able to close a loan in two weeks or less. This ability to close
quickly provides borrowers with a clear business advantage and affords them a
competitive edge based on speed.
A traditional loan can take anywhere from 60 to 90 days to close, and if you have a
borrower trying to purchase a property from auction or working against other deadlines, that won’t cut it. Speed of closing in private lending — which in some cases can
be as little as a few days — gives your borrowers a greater sense of security early in
the loan process.
Private lenders also establish their own lending criteria and common-sense underwriting guidelines, making them more flexible than traditional financing. With private
lending, no one in Washington is setting rates or dictating the box your borrower
needs to fit inside to be approved. Private lenders use their own money, so they set
the loan criteria. The lenders are the ones taking all of the risk, so if they don’t get paid,
that’s their problem, not the taxpayers’ problem.
When traditional lenders can’t provide a solution, private lenders have more room
for negotiating and can come up with creative answers. They evaluate the current
asset and look at the big picture, such as cash reserves, properties for cross collateral,
the value of the improved property, etc., instead of just focusing on the borrower’s
credit and background.
In some cases, you may have borrowers that check off all the right boxes to qualify
for traditional financing, but their property doesn’t meet the tests. Borrowers can
receive private funding on distressed, non-owner-occupied properties, properties in
need of extensive rehab or even new construction.
Take a borrower who owns a rental property with a great deal of equity, who
doesn’t have enough cash to purchase another investment property, for example. A
private lender can consider putting a mortgage on that existing property to pull out
some cash. The borrower could then put that money toward the purchase of the new
investment property. It is creative solutions like this that private lenders can provide
all the time.