same time. If that’s the case, you’ll need to tighten your buy box so that you only do deals with maximum profits. 4. Lenders are tightening their borrower qualification requirements Due to the uncertain environment, lenders have mitigated risk through overlay guidelines that necessitate: • Higher FICO scores and tighter credit requirements • A reduction in cash-out loans • More experience (which shows proof of execution) The investor approach: First, expect conservative underwriting and there may be longer times to process loans. Lenders want to see proof of execution, so be prepared with a track record document that outlines all the real estate investment deals you have completed. You also need to be prepared to show more liquidity and capital in your accounts. Finally, understand it’s more important than ever to pay close attention to your credit score, especially if it is in the 600s. Know that if you don’t have the experience, having things like more
differs from the Great Financial Crisis. In 2008, a lack of lending diligence helped lead to the real estate market crash. The credit industry learned from this event, and the fundamentals are much more sound now. Lending won’t be the reason for a real estate market crash this time. Proof of this is already there in how adjustments have been made to mitigate risk and ensure lending fundamentals remain sound. Sure, uncertainty remains for lenders and investors today. And we could encounter a tough stretch in the future. However, opportunities abound, especially in areas like new construction where there is an incredible need. Those that learn how to navigate the new lending landscape through a conservative approach and identify new opportunities stand to gain the most. Don’t think of the present lending landscape as an obstacle. The new lending terms align better with the norms of the past decade. This is good news for the housing market. It will set the stage for a strong recovery and long, steady growth—much like what we saw following the Great Recession. Growth will be driven by a strengthening economy, sound lending fundamentals, and strategic investors that know how to execute. For those who take a conservative yet savvy approach, the 2020s will be another decade of opportunity. •
The investor approach: Expect higher rates and a higher cost of capital. And adjust accordingly when calculating deals. Take this into account when analyzing the profitability of your deal. 3. Lenders are requiring [more] reserves Lenders want a guarantee of payments for their future portfolios. This ensures they have money for long-term payment plans to their investors. Requiring a deposit of payments from the borrower enables that. It also allows borrowers to not worry about debt payments. The investor approach: Expect to have more cash in reserves, enough to cover 6-12 months of future payments for principal, interest, taxes, and insurance. Before COVID-19, investors were expected to only have a few months of reserves, with many hard money lenders not requiring reserves at all. Given the amount of reserves you need, this will require more upfront capital and may limit you from doing as many deals at the
reserves and better credit can help, but it’s not always a 1-to-1 comparison.
THE ROADAHEAD IN REAL ESTATE LENDING From higher experience to greater reserves to lower leverage, investors must embrace the new reality. Yes, lending terms may appear ‘worse’ than pre-COVID, but it’s a much healthier, more stable place for the industry to be in. Also, what led us to this recession
Nathan (Nate) Trunfio is a real estate lending and investing expert, with a career that has spanned the entire real estate financing spectrum. He is the
President of DLP Direct Lending Partners, a national private lender, and has developed a multimedia platform, Talking Loudly with Nate, which leverages his expert position to provide other investors insight into all aspects of real estate investing.
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