Question for Lenders and Underwriters

[Franco Li]

Hello All! I'm very interested in hearing from lenders on how they assess the actual investment that they may be lending to. Understandably, the lenders perspective is to investigate a borrowers liquidity and debt servicing capability, but what methodologies do you use to review the actual investment? Do lenders actually model out the cash flow of a rental property or a flip? 

Thanks!

[Andrew Postell]

@Franco Li I can speak to the 1-4 unit property homes. There are going to be 3 different philosophies for analyzing a property for lending.  Each does use value as a part of their underwriting for the property but each does it a little differently.  Conventional, Hard Money, and Portfolio/Commercial lending are the 3 main methods.

Conventional lending is going to be mainly the "buy-and-hold" type of customer.  These loans are designed for permanent, long term financing.  The property is appraised using a "Uniform Residential Appraisal Report" which analyzes the value of the property by comparing it to comparable homes in the area (or "comps").  Cash flow is not considered a part of the collateral underwrite but it could be used to underwriter the borrower.  The condition and the value of the property are the most important factors in conventional appraisals.

For Hard Money Lending their method of underwriting NORMALLY uses an appraisal as well but their approval is based strongly on the exit strategy of the property.  Their appraisal will be a "After Repair Value" appraisal but if you are refinancing into a permanent loan because you rent the property it is viewed differently than if you flip.  And while appraised value is important their approval of the property will also be based on the end result.

Portfolio lending (or commercial lending) will be different from bank to bank.  This is because each bank's own portfolio money will be managed in a different fashion than another bank's portfolio money.  I have seen the approval based just on the cash flow of the property and I have seen cash flow not be a factor at all.  Again, they will almost always get an appraisal of some type but the approval of the property could be based on cash flow as well.

Hopefully some of this information is helpful.  Feel free to ask more questions. Thanks!