Unless you have been hiding in a cave without WiFi you have probably noticed that the rules of the lending game have changed. Just 2 ½ years ago, any borrower with a pulse that could find a property to purchase for 70% of the After Repaired Value (ARV) including the cost of repairs. They could easily find financing with a Hard Money Lender (HML). Money was pretty easy to find.
As all of us well know that is no longer the case.
HMLs are now looking at the strength of the borrower as well as the viability of the deal. Why has this come to pass? What does it mean to borrower? And how will this impact the market? Let’s find out.
So why have HMLs basically become “full doc” lenders? Necessity! When the markets were hot and any buyer with a pulse and a 550 mid score could get 100% financing from a “stated” sub-prime loan program, HMLs did not care what their borrowers looked like on paper because every deal flew off the books. Every borrower was making moneyon their Fix-&-Flips even with shoddy finish-out. Most importantly, HML’s were not worrying about foreclosing on their borrowers. In the rare occasions that they did have to foreclose the property was sold almost as-soon-as they got it back on the court house steps.
Then it happened. The credit markets tightened up and almost overnight the financing for retail buyers disappeared. Suddenly the borrowers were holding onto their loans longer and, as the realities sunk in that they might not be able to sell their investment property some began to default on their loans.
All of a sudden HMLs were faced with borrowers who were not making their loan payments. Due to their credit and finances, these borrowers were unable to refinance, the loan with a traditional lender. Some borrowers even went as far as removing new appliances and HVAC from the houses which were paid for by the HML as part of the rehab process. This meant the HML would have to foreclose if he/she wanted to protect the collateral. No longer was the deal alone sufficient underwriting criteria.
So what does this mean for borrowers now? Well, it means that we HMLs are going to look at your borrowers instead of just the property itself. As a borrower they will have to prove that they can support this loan as well as have some “skin in the game” in the form of actual cash in the deal. Equity is no longer enough. What will this look like?
After talking with most of my fellow local HMLs and discussing their current underwriting guidelines I have come-up with the following range of underwriting criteria:
Minimum Credit Score: 620 – 650 Mid Score
50% – 65% of ARV
Cash on Hand: 15% – 20% of loan amount
2 – 4 Months Banks statement showing cash on hand and few if any NSFs
Last 2 months Pay-stubs if employed. Last Years W-2 and Tax Returns if self employed
Finally the HML will make sure the property is not on a busy street and does not have any other location issues.
Bottom line: HMLs are now “cherry picking” the best deals to do each month. Volume is no longer the name of the game. Finding borrowers who will not default on their loans IS the new name of the game.
So what does all this mean for you?
If your borrower has “bad” credit, find a co-borrower that has “Good” credit.
Your borrowers need to have sufficient cash reserves on-hand. If your borrower doesn’t have the cash find a co-borrower that does.
Look closely for deals that are “no brainers”. Make sure that your borrowers have a solid “bulletproof” exit strategy.
Your Borrowers will need to know their comps and find and buy only houses that will sell fast and are located in areas that are holding value.
Money is still out there is still money out there for borrowers looking for deals on investment property. There are still ways for borrowers with marginal credit to buy and rehab houses. There are still “direct” HMLs making loans to qualified investors on qualified deals. However the deals need to be rock solid and so too must the borrowers.
Don’t think for a moment that your local HMLs are not funding deals everyday. We all are! We are all seeing better deals and better borrowers each and every day. There is capital available for your borrower's deals if they make sense and your borrowers or your co-borrowers qualify for the loan.
With all of the desperate homeowners losing their homes and banks with tons of REOs that are looking to deal, now is the time for your borrowers to find their “perfect” next deal. When you find it give your favorite HML a call. If they cannot help you call me.