5 Important Questions to Ask Before Choosing a Lender

5 Important Questions to Ask Before Choosing a Hard Money Lender - Actium Partners - Two people signing a loan

You have choices in your search for commercial funding. You can go directly to a bank or credit union. You can work through a broker. Depending on what you are trying to fund, you can even approach a hard money lender like Actium Partners. But like anything else, you shouldn’t settle on the first one you come across. Look around and compare lenders.

To that end, never be afraid to ask questions. In fact, ask as many questions as necessary to make you comfortable about choosing a particular lender. To get you started, here are 5 important questions to ask before choosing a lender:

1. What are your income verification requirements?

Lenders have different requirements in terms of income verification. Go to a bank, credit union, or broker and you will be required to verify every source of income down to the penny. Depending on your legal status as an individual or business owner, you might also have to produce bank records, tax returns, profit and loss statements, etc.

Hard money lenders like Actium Partners have very few – if any at all – income verification requirements. We approve loans based on asset strength. That is one of the things that sets hard money apart from conventional lending.

2. What are your typical loan terms?

Loan terms are something that don’t get a lot of attention when discussing the differences between commercial loan types. Here is the most important thing you should know about hard money: it is designed to be short term. A hard money loan of more than a couple of years is hard to come by. Loan terms of between 6 and 12 months are the norm.

Banks, credit unions, and third-party brokers typically work with conventional loans offering much longer terms. The longer terms can mean less expensive monthly payments. The trade-off is that, in the long run, borrowers are likely to pay more total interest over a longer term.

3. What are your points and interest rates?

You probably don’t have to be told to ask about interest rates. That’s what everyone thinks about when comparing loans. But don’t forget to ask about points as well. The combination of points and interest ultimately determine the total cost of borrowing. Note that hard money lenders and banks alike operate on points.

4. What is your down payment requirement?

Every lender, whether you are talking conventional or private, requires borrowers to make a down payment. The principle is pretty straightforward. Lenders want borrowers to have some skin in the game, so to speak. They expect borrowers to at least assume some of the risk.

Hard money lenders tend to require higher down payments compared to commercial banks. This is by design. But even with a bank or credit union, you are going to need a sizable down payment to get approved. The higher the down payment, the lower the total cost of borrowing.

5. Are there any penalty fees included?

Lenders may or may not choose to apply penalty fees in a variety of situations. This is true for both conventional and private lenders. For example, you may look at a loan offer from a bank and discover that there is an early repayment fee attached. Likewise, your hard money lender might attach a penalty fee if you’re forced to take the loan past its term.

There are certainly more questions you could ask before choosing a lender. These five offer a good starting point. In the end, choosing the right lender boils down to finding a loan that meets your needs provided by a lender you are comfortable working with.