When you apply for an investment loan, lenders will adjust or decrease the loan amount based on your qualifications, risks, and mitigants. Private lenders in real estate generally analyze these three factors related to the borrower: EXPERIENCE For most private lenders, experience is the most heavily weighted factor. Experience shows proof of execution and that you know how to navigate deals. In general, private lenders want to see how many real estate transactions you’ve completed over the last few years, how you’ve executed your business plan in the past, and if your previous deals were profitable. Based on your experience, lenders may have “tiers” for borrowers that provide different leverage or rate structures. Some lenders use a binary analysis of “experienced” or “not experienced” too. Typically, you can expect max leverage if you’ve completed two to six deals per year, over the last few years. CREDIT Most nationwide lenders use credit scores as a big factor in determining how responsible you are with repaying debt. If you have a good score, you can get better rates and terms and more leverage (a “good” credit score is 670 or above, according to Experian). Most lenders’ minimums are approximately 600-620. Note that more regionalized hard money lenders may focus more on your experience and liquidity, and might be willing to disregard your credit altogether. LIQUIDITY Liquidity, or how much money you have access to in your personal or business accounts, demonstrates your ability to contribute to the acquisition of a property and ensure that your project is properly capitalized. For
example, if you get a bridge loan through a private lender, they will likely want to see proof that you have the capital for all the monies due at closing, as well as reserves for at least half the payments of the full loan term. Finally, understand there’s actually a trend towards more consistency as investment banks, seeing the success of private lenders, have entered the game. This has led to the securitization of residential transition loans (more commonly known as fix-and-flip loans). Securitization is a process in which pools of loans are consolidated and sold to institutional investors. The institutional investors (the purchasers) won’t buy the loans without a third-party assessment of risk. This has led agencies like Morningstar Credit Ratings to develop criteria to rate fix-and-flip securitizations. As credit rating agencies have begun to rate real estate loans from private lenders, it has created a need to standardize the underwriting process because these loans must meet certain criteria to attract Wall Street investors. What does that mean for you? Going forward, where you get your loan can shed light on the borrowing process. With private lenders that balance sheet and hold their loans, the underwriting guidelines are more discretionary and proprietary. With a private lender that sells their loans, the underwriting guidelines must conform to their purchaser’s guidelines, so these lenders can’t always use as much discretion in making underwriting exceptions. HOWLENDERS STRUCTURE THEIR LOANS Now that you know how lenders analyze borrowers, let’s look at how they structure loans on each asset. This will help illustrate how you can get max leverage for a real estate deal.
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