What do hard money lenders need to see in terms of the deal?

[Michael Nelson]

Hi,

What seems to not be mentioned often is exactly what hard money lenders want when presenting the deal to them and what that turn around time is. 

Context- Where im looking properties that are good deals move fast. So I want to be able to make offers fast to secure the best deals. previously ive always had 20% down for each deal and already pre approved. I dont want to offer and put down ernest money and then have a lender say no go. Any advice on what they expect/need is appreciated Im new on this side of things.

[Stacy Raskin]

Hard money lenders vary on their underwriting guidelines but generally they are looking for:

1. Your Credit Score: 680+ or 700+ will get you better terms depending on the lender. 660 is the minimum for many lenders. Pricing generally is impacted by every 20 point increment of your middle mortgage FICO mortgage score so a 740-760 score will get a better rate than a 680-700 score.

2. Type of Market: Is it a declining market, is is suburban or is it rural? If an appraiser marks it rural, the lender may not do it or it will be a lower LTV.

3. Experience: Do you have any? Some care less about this but generally will impact how much they will lend to you. Some lenders will do up to 90% of purchase price and 100% of rehab up to 70-755% of ARV.

4. Do you have an LLC set up? Most lenders require this.

5. Most lenders will want a minimum of $100K for the property acquisition and rehab. Many lenders will charge additional rate increase if loan is under $150K. Lenders will generally not lend more for rehab than for the property itself. 

Most lenders will generally lend on 1-4 units and condos. These are generally 12-24 month interest only loans that borrowers will generally pay back by selling or flipping to long term financing like DSCR loans.

More on DSCR loans:

DSCR loans won't use your income to underwrite the loan.

DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth.

Here's a bit more in detail about how rates are calculated for DSCR loans:

1. Credit score- the higher the best. 760+ generally gets best pricing for investment property loans with most lenders

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.

3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.

4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs.

I've included an example below to help illustrate this.

So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.

See example below:

DSCR < 1

Principal + Interest = $1,700

Taxes = $350, Insurance = $100, Association Dues = $50

Total PITIA = $2200

Rent = $2000

DSCR = Rent/PITIA = 2000/2200 = 0.91

Since the DSCR is 0.91, we know the expenses are greater than the income of the property.

DSCR >1

Principal + Interest = $1,500

Taxes = $250, Insurance = $100, Association Dues = $25

Total PITIA = $1875 Rent = $2300

DSCR = Rent/PITIA = 2300/1875 = 1.23

DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals.