Hard Money Lenders lend private funds to Investors. Many of the loans are Fix and Flip Loans. A Real Estate Investors loan profile plays a salient role in the lender’s decision process and analysis. The Home Loans lender, in a comprehensive manner, in order to deem any lending activity a prudent risk to the loan portfolio. Each Hard Money Loan institution has its own underwriting guidelines.
The hard money lender evaluates a potential borrower according to these standards. However, there are elements that are regarded as significant across the industry. The ideal real estate loan borrower has excellent credit, an extensive track record, and robust liquidity.
A bridge lender will also scrutinize the real estate loan borrower’s investment and exit strategies to ensure they are reasonable. These factors, working in tandem, serve to construct the borrower’s risk profile.
A good example is the Houston market. Hurricane Harvey destroyed thousands of homes. Now, Houston Hard Money Lenders are lending to rehab them. The Houston Investors credit is essential as it provides a detailed history of the borrower’s experiences and tendencies in that role. The hard money lender has the opportunity to review this data and determine whether the real estate loan borrower has developed positive, or negative patterns with their credit.
The examination of credit history, at least five is vital. These historical payment patterns are more representative of the borrower’s current activity and trends. A high credit score detailing consistent timely payments, especially of mortgage debt, is a boon to the lender’s risk analysis.
Experience in real estate transactions also reduces risk to the lender. There is a high degree of regulation that a real estate loan borrower must navigate during the real estate investment process. Furthermore, issues can arise on the ground. Issues from real estate development to disposition, can put the investment property, and therefore the mortgage, in jeopardy. Ergo the ability to manage these challenges is important to a hard money lender.
Liquidity is necessary in order to close the real estate loan, to cover the down payment and closing costs, and serves as a cushion. While the cash-flow from an investment property would cover the mortgage under normal circumstances, strong borrower liquidity would prevent the mortgage from defaulting in the event cash-flow were to decrease.
Sound Investment Strategy is Key For a Real Estate Borrower
Both the borrower investment and exit strategies are paramount to the analysis of the potential loan, especially for a bridge lender. The investment strategy outlines the project as core, value-add, or even opportunistic in nature. It needs to be viable and sensible as it relates to the acquisition or refinance.
This is where the exit strategy then comes into play. The bridge loan is temporary in nature and the balloon payment at the end of the term must be covered. A strong real estate loan borrower will arrange for conventional financing if she wishes to hold the property, or a sale, or if she wishes to fix and flip the property, before the bridge loan matures. The investment and exit strategies work in a synergistic manner. A sound investment allows for a smooth exit.
These five factors are integral to the assessment of risk. A real estate loan borrower that exhibits these features, and considered or addressed his or her investment and exit strategies in an astute fashion, Hard Money Lenders will sail through a loan committee review.