How Do You Decide If a Borrower Is a Good Fit?

Question

When you’re deciding whether to lend to someone, what do you look at first? Is it their credit score, their track record with loans, or the investment they’re trying to fund? Do you rely more on the deal itself or the person behind it? And are there any big red flags that make you walk away from a deal right away? Curious to hear how others approach this!

Jeff S. · Answer

We won’t lend a dime to anyone unless we’ve gone to lunch, gotten to know them a bit, and looked at a few of their properties. In our view, experience and integrity are by far the most important parts of any private loan. You only get a sense of this by meeting face-to-face once or twice.

A bad borrower can kill a great project. A good, experienced borrower can turn around even an unexpectedly bad deal. I was once told jokingly that we bet on the jockey, not the horse.

Next comes the property. The borrower must have a good deal from which they will make a fair profit. We have specific and unyielding criteria for this, which we provide to all potential borrowers in advance. We don’t use LTV explicitly, but using our criteria, it ends up around 55% to 65% of the ARV. We are direct lenders, meaning we lend our own money, for flips within approximately 1½ hours of our home.

We walk through every property to avoid surprises and to confirm the rehab estimate. In addition, we pull our own comps and use Lightning Docs to generate our loan documents. This allows us to close extremely quickly, which is an important competitive advantage.

I don’t know how to read our own tax returns, and I’m certainly not going to read yours. The same goes for your credit score, which tells us nothing about your ability to flip a house and pay us back.

In sum: Experience, Integrity, a Killer deal.

Pierce Mooney · Answer

This was an interesting thread to read!  I appreciate the difference in approaches.  One lender says only LTV & Credit, another says credit tells nothing about ability to repay (seems true, it's more about willingness to repay past lenders) and that experience integrity and deal in that order.  Good insights thanks everyone.  I think ability to pay and credit should both be weighed along with everything @Mike Grudzien said

Mike Grudzien · Answer

Look at all the above and more.History, experience, assets, ability to pay, collateral, references, credit score, etc.The more the better.  BE exhaustive!

Jeff S. · Answer

Quote from @Jonathan Warner:

“Have you found that lightning docs has been airtight for you? I was considering having a lawyer draw up a baseline loan doc and make tweaks to it on a per loan basis. I’m assuming that you save quite a bit of money.”

We’ve been lending since 2010 and have never had a loan contested. We’ve only foreclosed on a few properties, all without issue, so I’m uncertain what qualifies as 'airtight,' Jonathan.  What are your concerns?

Lending laws change frequently, and we receive emails from Lightning Docs throughout the year explaining their updates to the documents we use here in CA. Can you keep up and afford to have your lawyer update your documents?

We pay Lightning Docs a $500 annual fee and $500 per loan, which we charge to our borrowers at closing. This way, we receive continuous updates from attorneys who eat, sleep, and breathe lending at minimal cost and we know we are always up to date. Unless your deals are particularly complex or unique, why would anyone pay to maintain their loan documents anymore?

Jonathan Warner · Answer

Have you found that lightning docs has been airtight for you? I was considering having a lawyer draw up a baseline loan doc and make tweaks to it on a per loan basis. I’m assuming that you save quite a bit of money.

Patrick Roberts · Answer

5C's of credit are a good framework to understand the fundamentals. The type of lending matters as well. ABL, which is the basis for HML/fix and flip lending, will have different criteria and different focuses than multi-year loans based on cashflow and borrower credit score (long term mortgages). Within each of these loan types and structures, you'll find commonalities and similar bases, but only conforming and govvy loans will have the exact same rulesets universally.

For instance, in my private lending, I dont really give a numerical credit score much weight, but I absolutely look at the composition and history of the individual tradelines on a report if the borrower is a smaller outfit, such as a single member LLC or similar solopreneur-type operator. But, if the deal is a true ABL play, I may not even look at a credit report at all. I always dig into the borrower though (character) - honesty, experience, skill-level, etc. Dishonesty and lack of integrity in any form is a dealbreaker for me. "The first thing for me is character, before money or anything else. Money cannot buy it..."

This is a complex question that will not have any one answer. Credit analysis and underwriting are as much art as science.

Brandon Croucier · Answer

LTV & Credit

Eliminate the emotion and treat this like the business it is.

In my opinion it does not matter who the borrower is as long as they have a track record of ATR (Credit)

And I feel comfortable with the leverage (LTV)

Ed Long · Answer

Thank you all for your responses—they are very much appreciated! I’ll make sure to remember all of your advice. While some of the answers were different from each other, I completely agree with all of them. At the end of the day, experience truly is the best teacher.

Looking forward to learning and growing from this journey!

How Do You Decide If a Borrower Is a Good Fit?

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