New Realities for Hard Money Borrowers
In case you have been hiding in a cave without Wi-Fi you have noticed the rules of the game have changed. It used to be, just 9 months ago, that any rehabber with a pulse that could find a house to purchase for a price of 70% of the After Repaired Value (ARV) including the cost of repairs, could find financing with a Hard Money Lender (HML). As many of you 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 rehabbers? How will impact the market? Let’s find out.
So why have HMLs for all intents and purpose 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 their books. Every investor was making money on their Fix-&-Flips even with shoddy finish-out. 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 the retail buyers disappeared. Suddenly the rehabbers were holding onto their loans longer and as the realities sunk in that they might not be able to sell their investment house some began to default on their loans. All of a sudden HMLs were faced with borrowers who were not making their loan payments and, 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 buy the HML as part of the rehab process. This meant the HML would have to foreclose if he wanted to protect his collateral. No longer was the deal alone sufficient underwriting criteria.
So what does this mean for Rehabbers? Well, it means that we HMLs are going to look at you as the borrower as well as the rehab itself. It means that the days of easy money are gone and in many if not all cases, you will have to prove you can support this loan as well as have some “skin in the game” in the form of actual cash in the deal. Equity will no longer be 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: 600 – 650 Mid Score
· Cash on Hand: 5% - 10% of loan amount
· 2 – 4 Months Banks statement showing cash on hand and few in 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: We 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? Well if you have “bad” credit, find a co-borrower that had “Good” credit. It means that you need to have sufficient cash reserves on-hand. If you don’t have the cash find a co-borrower that does. Look closely for deals that are “no-brainers”. Make sure that you have a solid “bulletproof” exit strategy. Know your comps and find and buy only houses that will sell fast and are located in areas that are holding value. Don’t cut corners on your rehab to save a few bucks. Your HML will not reimburse you for those shoddy repairs nor will buyers accept them. There is too much inventory for buyer’s to choose from now. They can afford to be picky. There is still money out there for rehabbers.
There are still ways for rehabbers with marginal credit to buy and rehab houses. There are still “direct” HMLs in Dallas making loans to qualified investors on qualified deals. However the deals need to be rock solid and so too must the borrowers. Please 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 deals if they make sense and you or your co-borrower 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 you to find your "perfect" next deal. When you find it give your favorite HML a call. If they cannot help you call me.
Good luck!
So why have HMLs for all intents and purpose 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 their books. Every investor was making money on their Fix-&-Flips even with shoddy finish-out. 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 the retail buyers disappeared. Suddenly the rehabbers were holding onto their loans longer and as the realities sunk in that they might not be able to sell their investment house some began to default on their loans. All of a sudden HMLs were faced with borrowers who were not making their loan payments and, 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 buy the HML as part of the rehab process. This meant the HML would have to foreclose if he wanted to protect his collateral. No longer was the deal alone sufficient underwriting criteria.
So what does this mean for Rehabbers? Well, it means that we HMLs are going to look at you as the borrower as well as the rehab itself. It means that the days of easy money are gone and in many if not all cases, you will have to prove you can support this loan as well as have some “skin in the game” in the form of actual cash in the deal. Equity will no longer be 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: 600 – 650 Mid Score
· Cash on Hand: 5% - 10% of loan amount
· 2 – 4 Months Banks statement showing cash on hand and few in 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: We 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? Well if you have “bad” credit, find a co-borrower that had “Good” credit. It means that you need to have sufficient cash reserves on-hand. If you don’t have the cash find a co-borrower that does. Look closely for deals that are “no-brainers”. Make sure that you have a solid “bulletproof” exit strategy. Know your comps and find and buy only houses that will sell fast and are located in areas that are holding value. Don’t cut corners on your rehab to save a few bucks. Your HML will not reimburse you for those shoddy repairs nor will buyers accept them. There is too much inventory for buyer’s to choose from now. They can afford to be picky. There is still money out there for rehabbers.
There are still ways for rehabbers with marginal credit to buy and rehab houses. There are still “direct” HMLs in Dallas making loans to qualified investors on qualified deals. However the deals need to be rock solid and so too must the borrowers. Please 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 deals if they make sense and you or your co-borrower 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 you to find your "perfect" next deal. When you find it give your favorite HML a call. If they cannot help you call me.
Good luck!
posted by Rob at 5:59 PM
