How to safely navigate the private mortgage lending process

How to safely navigate the private mortgage lending process

Property investment is not without its challenges, even for seasoned participants, but there are ways to mitigate the risks, and ensure a higher likelihood of receiving a solid return on your investment. If you are considering providing funding through private mortgage lending, you need to have a keen understanding of how to perform a thorough due diligence on the potential borrower, and the property, before committing to a loan.

Investors need to understand that the US property market operates very differently to the South African market, so it is important to ensure that you take every opportunity to mitigate risk. The best way to do that, is to draw on the experience and expertise of a knowledgeable, experienced, and honest private broker/lender who has real estate experience, and local experts on the ground who will assist in guiding you through the process.

Over the years, the YDL team has gained a solid understanding of the Private Mortgage Lending, speculative, and buy-to-let residential markets in the USA, with a particular focus on Atlanta, Georgia. We’ve also grown our operations in Atlanta to include a network of long-time residential property investment professionals, who know their city well. They are invaluable assets when it comes to doing our checks and balances when deciding whether to grant the loan.

Vetting the borrower

Private mortgage lending occurs when a private individual, or organisation, lends money to a borrower. At YDL Property Investments, the loans we facilitate are typically made to legal entities (LLC’s). It is important not only to vet the legal entity, but the people behind the entity as well.  The best way for a lender to assess a borrower’s viability is to perform a thorough due diligence on both of them, and the property, before committing to a loan. This will give you insights into the likelihood of them repaying the private mortgage loan, and will indicate whether the property will cover the loan should the borrower default on payments. In addition we obtain a personal guarantee from the individual behind the loan.

When deciding whether or not to grant the loan, we typically start by trying to gain a comprehensive picture of the borrower. A good starting point is checking the borrower’s credit record to see if they have a history of paying their debts. We look closely at their property investment track record, paying attention to the number of deals they’ve done in the past and the profitability of those deals. We ensure that we have a signed Credit Application Form, and the borrower’s latest bank statements, against which affordability of the loan is assessed.

We also obtain tax returns for the last 2 years for the legal entity and check whether this matches with the income claimed on their Application Form. There are additional checks and balances that we go through when vetting the borrower, but I’m sure you’re getting the picture of how in-depth the due diligence needs to be.

Vetting the property

When it comes to the property to be purchased by the borrower, it is equally as important to perform a thorough due diligence. That’s because the property will be used to secure the loan on a first lien basis. A first lien mortgage is a legal agreement that conveys the conditional right of ownership of an asset or property by its owner (the mortgagor/borrower) to a lender (the mortgagee) as security for the loan. This means that should the borrower default on the loan you will be the first debtor settled through the sale of the property.

During this phase some of the steps that we go through include: confirming the information on the property such as its location; ascertaining whether or not the area is a good one to invest in; and obtaining an independent valuation of the current, and potential post-rehab value of the property.

We also try to understand what the borrower wants to do with the property, gaining insights into the extent of the property’s planned rehabilitation, how much square meterage, and financial value it will add to the property, and whether or not the projected budget for the property is realistic or not. There is also a strict, stipulated requirement for the renovations to be carried out by a licenced builder who carries the requisite insurance. As with the due diligence on the borrower, these are just some of the steps in our decision process.

All of the outcomes of the due diligence process are taken into account when determining the terms and conditions applicable to the specific loan, such as the required deposit, and duration of the loan.

Simplifying a complex process

A leading reason that a borrower will turn to a private mortgage lender for a loan is due to the private lender’s ability to approve loans more quickly than traditional mortgage lenders. For this reason, the borrower assessment process needs to happen quickly, and extremely efficiently. It is therefore useful to partner with an experienced team you can trust, that will help you to gather the necessary intelligence, and who have the financial acumen to assist with the decision to grant the loan. At YDL Property Investments we have the capacity and skill set to take care of the complex approval process for you.

Contact us today to learn more about Private Mortgage Lending as an opportunity to diversify your portfolio.

Contact YDL today to arrange a personal consultation, and discover how we can help you expand your investment horizons. Contact us

A Private Mortgage Loan Success Story

Our borrower transformed this previously neglected property from a 2 bed, 1 bath, 1,108 sq.ft home, into a 3 bed, 2 bath home with great curb-appeal, by adding approximately 500 sq.ft.

YDL granted the borrower a private mortgage loan of $133,508. The home was purchased for $58,500.00 and we retained  $82,000 to fund the rehab, with payments made based on progress of the renovation. The loan was secured by a first lien against the property, as well as personal guarantees by the borrower. As the borrower started the rehab, payments were released based on progress of the renovation. Each phase was assessed by an inspector prior to the release of further funds. This also helped to mitigate risk throughout the property’s rehabilitation.

The project took just under 6 months, and the borrower sold the property for $207,500. YDL’s gross annualised return was 20%.

Some More Past Deals