Tips for Private Investors and Hard Money Lenders

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ADVICE FOR PRIVATE LENDERS AND INVESTORS

Private lenders were hardest hit by the housing slump due to the poor credit underwriting that was prevalent during the boom era. All that mattered was a low loan-to-value (LTV) ratio. Loan to value is a financial ratio that expresses the amount of a first mortgage lien as a percentage of the total appraised value of a property. For example, if a borrower borrows $100,000 to buy a house worth $120,000, the LTV ratio is $100,000/$120,000 or 83%. This example shows a relatively low equity margin (17%) that would be wiped out in the event of a foreclosure. The lender may never fully recover the loan from foreclosure proceeds, as discussed below.

Loan balance – $100,000

Late payments; principal and interest – $10,000

Foreclosure, legal fees – $7,000

Miscellaneous expenses – $8,000

Total Due – $125,000

Foreclosure Sale Price – $90,000

Loss for the lender – $35,000

Prudent lending requires a lender to analyze the borrower’s ability to pay in addition to taking adequate collateral and considering a much smaller online loan with a low LTV ratio. Conventional lenders insist on a maximum of 80% LTV (also the regulator’s maximum LTV requirement) and 1.20 times the debt service coverage ratio. Private lenders, however, opt for a maximum of 65% LTV and ignore DSCR altogether. Here is the problem. A loan that subsequently becomes delinquent a few months after disbursement continues to attract interest and late payment charges, thus eroding collateral coverage. On the other hand, a borrower whose DSCR is strong from the start is unlikely to miss payments for at least several months after disbursement.

As a private lender, you should ask yourself the following key questions and be satisfied with the corresponding answers, then gather the loan documents and have a credible credit underwriter analyze the loan applications for you.

  1. Who is the borrower and what is their credit history?
  2. What is the borrower’s net worth in the transaction? Is it adequate?
  3. What is the repayment capacity of the borrower? From what sources?
  4. What is the pledged warranty and LTV?
  5. What are the economic and other conditions that present a risk?

Here are the minimum documents you want to gather for loan analysis and underwriting:

LETTER OF INTENT

1. Submission Form / Loan Summary – including loan details, debt

interview and exit strategy

2. File F1003 or Fannie Mae 3.2, or personal financial statement

3. Recent appraisal or photos

4. Recent credit report

LOAN SUBMISSION (Loan Package)

RESIDENTIAL LOANS

1. Submission Form

2. File F1003 or Fannie Mae 3.2, or personal financial statement

3. Recent credit report (<90 days)

4. 2 years of personal and business taxes (if applicable)

5. Loan summary with detailed LOE for withdrawal and exit strategy

6. Investment properties – Rent register or copy of lease(s)

7. Purchase contract signed for a purchase

8. Recent appraisal or photos with MLS comps sold – No comps listed

MULTI-FAMILY LOANS

1. Submission Form

2. File F1003 or Fannie Mae 3.2, or personal financial statement

3. Recent credit report (<90 days)

4. 2 years of personal and business taxes (if applicable)

5. Loan summary with detailed LOE for withdrawal and exit strategy

6. Rent Roll 6 months in a row

7. Purchase contract signed for a purchase

8. Recent appraisal or photos with MLS comps sold – No comps listed

9. Construction of the YTD and personal balance sheet with YTD P&L for 2 years

COMMERCIAL LOANS

1. Submission Form

2. File F1003 or Fannie Mae 3.2, or personal financial statement

3. Recent credit report (<90 days)

4. 2 years of personal and business taxes (if applicable)

5. Loan summary with detailed LOE for withdrawal and exit strategy

6. Rent register or copy of the lease(s)

7. Purchase contract signed for a purchase

8. Recent appraisal or photos with MLS comps sold – No comps listed

9. Construction of the YTD and personal balance sheet with YTD P&L for 2 years

CONSTRUCTION LOANS

1. Submission Form

2. File F1003 or Fannie Mae 3.2, or personal financial statement

3. Recent credit report (<90 days)

4. 2 years of personal and business taxes (if applicable)

5. Loan summary with detailed LOE for withdrawal and exit strategy

6. Development or Construction Cost Allocation Sheet

7. Draw Schedule

8. Purchase contract signed for a purchase

9. CV of the entrepreneur

10. Recent appraisal or photos with MLS Sold Comps – Future/

Estimated Completion Value

11. YTD balance sheet with YTD P&L for 1 year

REHABILITATION LOANS

1. Submission Form

2. File F1003 or Fannie Mae 3.2, or personal financial statement

3. Recent credit report (<90 days)

4. 2 years of personal and business taxes (if applicable)

5. Loan summary with detailed LOE for withdrawal and exit strategy

6. Investment properties – Rent register or copy of lease(s)

7. Purchase contract signed for a purchase

8. Recent Appraisal or Photos with MLS Sold Comps – Not Listed

Comp. Estimated future value

9. Allocation of rehabilitation costs

10. Rehab Draw



Source by Franc Jo

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