The Changing Nature Of Hard Money Borrowers

Not only has the way hard money loans are underwritten and funded changed but borrowers too. Until 18 months ago hard money borrowers were in situations so difficult that they could not get financing from banks. At the time, up to mid August 2007, subprime loans were available and only a limited numbers of borrowers needed access to hard money loans. These loans were mostly bail out loans or sometimes for “special” properties.

For the past 18 months hard money borrowers profiles have completely changed. Today bail out loans are not being approved anymore except in cases where there is so much equity that the lender cannot loose. Hard money borrowers, today, are investors with good credit or first time borrowers who need to go stated income and who are buying REO properties. Today if a borrower has a credit score below 590 the likelihood that their loan will be funded is low. However, such as everything in private lending there are always plenty of exceptions.

The typical borrower today will be most likely a buyer. In general this borrower will be open to put 30% to 35% down and in some markets up to 40%. The average Fico for current hard money borrower is 670 and up. We see numerous borrowers with Fico above 700 and sometimes above 750. Most borrowers have assets in excess of the down payment and closing costs. However, for first time home buyers there is less reserves than for investors. Finally most borrowers are employed or can show income. This apply primarily to residential borrowers. For hard money commercial borrowers the same apply.

Good Loan, Think Again!

A friend of mine who has great credit, great assets and money in the bank can not get a loan today because she has to go stated. My friend a self employed person who has a track record of over 10 years with a national bank does not meet the guideline anymore. Instead, this person has to find a local bank that will be willing to make an exception. That exception is going to cost a lot of money.

A loan described above once was considered an A++ loan, today it can only be funded with a lot of difficulties. This situation applies to all the areas of real estate lending. When meeting your borrowers and after taking an application you may think that you have a loan even if it is a hard money one, just think again. In today’s lending world there is a limited number of funding sources for in regard to the demand. When there is limited product availability in relationship to the demand normally prices increase. In today’s lending world prices are not increasing, per se, a lot of people are just not going to get funded.

Until recently, if you thought that you had hard money loan and that you had done your homework, the likelihood that the loan would get funded was high. The same loan today may or may not get funded because investors, lenders, funds can pick and choose the deal they want. What 6 months ago was considered a decent hard money loan will not get funded today or with difficulty. The cost of a hard money loan is the same in reality as before but the type of loans that are getting funded are not. Today loans that are getting funded with hard money were until few months ago financed by banks under their standard programs. Today hard money lenders can fund loans where borrowers have 700 plus credit, money in the bank, but for a reason or another can not get a bank loan. Other loans well get second priority.

My recommendation to all of you borrowers, loan officers and real estate agents get to know few hard money lenders. Understand their strength, how they go about underwriting the type of property they look at then you will be successful. A hard money lender is interested in working with people who have a good understanding of their files. Shopping in most cases is counter productive to having a loan close.