How To Screen Your Investment Real Estate Lender

By A. I. Lendberg, Edited by Douglas Katz – 05/10/23

Real estate investing can be a great way to build wealth, but a lot of variables can contribute to or detract from your success.  Finding the right lender is one of the most important for a successful investment. While not generally understood by the borrowers, there is a vast difference between the conventional/government residential lending marketplace and the non-qualified mortgage/hard money space.  The most important thing to remember is that oversight, licensing, regulation and other protections accepted as the norm for Fannie Mae, Freddie Mac and government loans are generally absent.  This is in many ways a benefit, but only if you, as an investor, are deliberate and discerning in your choice of lenders.  Here are some things real estate investors can do to make sure their lender is trustworthy and legitimate.

Do Your Research

Before you work with a lender, look up their background and history. Check their website and look for reviews or testimonials from previous clients. If you find negative reviews or complaints filed against them with regulatory agencies, it’s best to ask about the situation and see what they details were from their point of view.  If there is a lot of bad reviews or if they cannot address this issues yo your satisfaction, it is best to look elsewhere.

The good news is that the internet is of huge benefit.  First and foremost, go to their site and get an idea as to their business.  Does it look like they a professional organization that takes pride in their brand and their business?  Does it look like they are a business at all?  How are the reviews and, more importantly, how did they solve the issues?  Finally, is the person or persons with whom you will do business someone of character that you trust?  One good way to check is to compare their site, if they have one, to their social media and other aspects of their digital footprint.  I one had an source of funding reach out to me to get my business.  When I saw the site was offshore and that his pics did not match.  Do you think that I looked any further when my clients experience us based on that?  There is nothing he could have said to recover.  This is the same thought process that you should use.  You can research lenders by searching for their name on popular review websites like Google, Yelp, or the Better Business Bureau.

Check the Lender’s Credentials

It’s important to make sure that the lender you’re working with is licensed and registered with the relevant regulatory authorities. You can verify their credentials by contacting the state agency that regulates mortgage lending or checking with the National Mortgage Licensing System.  It is important to know that many lenders will not have this.  As I mentioned earlier, this is an unregulated marketplace, but if your lender does have one and has experience in the residential marketplace that is a benefit to you.  Not only did they need to pass competency tests and background checks, but they also likely know a ton about lending.

Also, look at other credentials and experience.  I am a veteran, for example, and many of my clients are also veterans.  They know they skills and discipline required for success and the military and know that these will benefit them with their deal.  This is not a lending credential, but it is no less important.  You need to have an idea of what credentials are important and make that part of your interview and decision processes.

The information for this is also very easy to find.  For licensing, you can check if the lender is registered with the Nationwide Mortgage Licensing System (NMLS) by visiting their website and searching for the lender’s name.  For other credentials, I recommend looking at their site and LinkedIn bios.  Most people will post and promote credentials as a differentiator.  If you see something that sparks a question, ask them or check with the entity that provides the credential in questions.

Compare Interest Rates and Fees

Terms are hugely important, but rate myopia and terms above all else can be a bad approach.  In fact, when you think about engaging in an unregulated marketplace with a singular focus on rates, you might as well wear a t-shirt that says fleece me.  It may be a shocking revelation but the unsavory folks without the skills, credentials and other components that you are seeking tend to sell on price and terms.  Many are fantastical and seem like the answer to your dreams, but it is important to ask how and compare.  How can a lender offer such great terms when  the others cannot.  Often times, bait-and-switch behavior and end of deal surprises come with great terms

The best way to avoid this, does take some work.  You know that should always compare interest rates and fees from different lenders to make sure you’re getting a competitive rate, but be cautious of lenders who offer unusually low rates or charge excessive fees.  To accomplish this, you can compare interest rates and fees by obtaining quotes from multiple lenders and then comparing them side by side.  Did they send you a term sheet or an email?  One versus the other says a lot?  Do they provide you a likely inaccurate rate with little or no information or do they legitimately ask you for the information and documentation required for an accurate price?  This is also a good time to determine how they will do business once you are in a deal and it is a good time to evaluate compatibility.

Review Loan Documents

Review loan documents carefully before signing. Make sure you understand the terms and conditions of the loan. Be wary of any lender who pressures you to sign without fully understanding the terms of the loan or who cannot fully explain the specifics.  Remember, this market is unregulated and, as a a result, they documents vary considerably from lender to lender.  Do not expect the familiar documents like the pre-approval letter or loan estimate that you have come to expect from a residential deal.  You should take the time to make sure that you understand the documents, the terms, the process and what is expected of you during the loan process and after.

This is not a learn by doing thing, so get help.  If there is anything that seems odd, you can review loan documents with a trusted friend or family member to make sure you understand all the terms and conditions.  It is important, however, to use the right resources.  I have had deals die for the wrong reasons when an expert in a field tangential to real estate investment gets involved and misrepresents something inadvertently.  If there are questions use an expert AND your lender.

Ask Questions

Don’t be afraid to ask questions about the loan process, interest rates, fees, and any other concerns you may have.  A good lender will be transparent and willing to answer your questions.  They will respect and answer even the simplest of questions without hesitation.  I recommend at a minimum having a list of questions prepared for the introduction meeting to get a feel for your lender and again after the application and receipt of the term sheet.  Because terms and even the servicing of a loan can varies between lenders do not assume anything.

Questions serve two purposes and I encourage investors to ask them even if you know the answers.  There is not better way to find and eliminate a BS artist than asking them a question to which you know the correct response.  Your lender may articulate something differently that you would but you should definitely be able to determine whether they are professionals or just doing this for the quick buck.

Seek Professional Advice

As with any career, the best providers have a good reputation.  I consider asking one of your trusted advisors in other disciplines for a referral, especially if their business benefits from having a good lender.  Consider consulting with a real estate attorney or financial advisor before working with a lender to see who they recommend. They can even provide guidance on the loan process and help you identify any potential red flags.

It can also help during evaluation of a new lender to use your professional network.  Assuming that they have the time, do not be reticent to involve other professionals in your evaluation process.  They can look at anything from the lenders correspondence to the loan documents to ensure that the transaction is on the up-and-up and that your best interests are being covered.

Ask for References

Finally, ask the lender for references from previous clients. Contact these clients to ask about their experience with the lender, including their level of professionalism, responsiveness, and overall satisfaction with the loan process.  This one can sometimes be a little more difficult and you may be directed to online reviews.  Additionally, a lender would likely only provide you their best clients for this, but it is no less useful.  It is perfectly reasonable, to ask the lender to provide you with the contact information of their previous clients, or you can ask for references on online forums or real estate investment groups.  I would say, however, that this is one of the least important and should not be a means of elimination.

Not Too Hard to Find Good Hard Money

In conclusion, finding a trustworthy and legitimate lender is important for real estate investors. By doing research, checking credentials, asking for references, comparing rates and fees, reviewing loan documents, asking questions, and seeking professional advice, you can ensure a successful investment and protect your financial future.  The most important thing is to remember that this is your loan and you should be selective.  This is an interview process and you should treat it as such and, while any process does need to consider your creditworthiness, experience and financial strength, you should be able to best choose a lender with a little work and consideration.

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Disclaimer: This article was created with the assistance of multiple ChatGPT AI language models and has been edited and refined by Douglas Katz. The information provided in this article is intended for general informational purposes only and should not be considered as professional or expert advice. The views expressed in this article are solely those of the author and do not necessarily represent the views of ChatGPT or OpenAI. Readers are advised to do their own research and consult with relevant experts before making any decisions based on the information provided in this article.