Tips for Private Investors and Hard Money Lenders

TIPS FOR PRIVATE LENDERS AND INVESTORS

Private lenders were hit hardest in the property meltdown because of poor credit underwriting that prevailed in the boom era. All that mattered was low loan-to- value (LTV). Loan to value is a financial ratio that expresses the amount of a first mortgage lien as a percentage of the total appraised value of real estate property. For instance, if a borrower borrows $100,000 to purchase a house worth $120,000, the LTV ratio is $100,000/$120,000 or 83%. This example shows a relatively thin equity margin (17%) which would be wiped out in case of a foreclosure. The lender may never recover the loan fully from foreclosure proceeds as shown below.  money lender singapore

Loan balance – $100,000

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Late payments; principal and interest – $ 10,000

Foreclosure, legal expenses – $ 7,000

Misc. expenses – $ 8,000

Total due – $125,000

Foreclosure sale price – $ 90,000

Loss to Lender – $ 35,000

Prudent lending requires a lender to analyze the borrower’s ability to pay besides taking adequate collateral and considering a much smaller loan in line with a low LTV ratio. Conventional lenders insist on a maximum of 80% LTV (Also regulator’s maximum LTV requirement) and 1.20 times Debt Service Coverage Ratio. Private lenders, however, go for a maximum of 65% LTV and totally disregarding DSCR. There lies the problem. A loan that subsequently becomes delinquent a few months after disbursement continues to attract interest and late payment charges, thus eroding collateral cover. On the other hand, a borrower whose DSCR is strong from the start is unlikely to miss payments at least several months after disbursement.

As a private lender, you should ask yourself the following key questions and satisfy yourself with the answers thereof, then gather loan documentation and get a credible credit underwriter to analyze the loan requests for you.

  1. Who is the borrower and what is the borrower’s credit record?
  2. What is the borrower’s equity in the deal? Is it adequate?
  3. What is the borrower’s capacity to pay? From which sources?
  4. What is the collateral and LTV being pledged?
  5. What are the prevailing economic and other conditions that pose risk?

The following are the minimum documents that you want to gather for loan analysis and underwriting:

LETTER OF INTENT

1. Submission Form/ Loan Summary – including loan details, debt

servicing and exit strategy

2. F1003 or Fannie Mae 3.2 file, or Personal Financial Statement

3. Recent Appraisal or Pictures

4. Recent Credit Report

LOAN SUBMISSION (Loan Package)

RESIDENTIAL LOANS

1. Submission Form

2. F1003 or Fannie Mae 3.2 file, or Personal Financial Statement

3. Recent Credit Report (<90 days)

4. 2 Years Personal & Business Taxes (if applicable)

5. Loan Summary with Detailed LOE for Cash Out & Exit Strategy

6. Investment Properties – Rent Roll or copy of lease(s)

7. Executed Purchase Contract for a Purchase

8. Recent Appraisal or Pictures with MLS Sold Comps – No Listed Comps

MULTI-FAMILY LOANS

1. Submission Form

2. F1003 or Fannie Mae 3.2 file, or Personal Financial Statement

3. Recent Credit Report (<90 days)

4. 2 Years Personal & Business Taxes (if applicable)

5. Loan Summary with Detailed LOE for Cash Out & Exit Strategy

6. Rent Roll 6 month trailing

7. Executed Purchase Contract for a Purchase

8. Recent Appraisal or Pictures with MLS Sold Comps – No Listed Comps

9. YTD Balance Sheet Building and Personal with YTD P&L for 2 years

COMMERCIAL LOANS

1. Submission Form

2. F1003 or Fannie Mae 3.2 file, or Personal Financial Statement

3. Recent Credit Report (<90 days)

4. 2 Years Personal & Business Taxes (if applicable)

5. Loan Summary with Detailed LOE for Cash Out & Exit Strategy

6. Rent Roll or copy of lease(s)

7. Executed Purchase Contract for a Purchase

8. Recent Appraisal or Pictures with MLS Sold Comps – No Listed Comps

9. YTD Balance Sheet Building and Personal with YTD P&L for 2 years

CONSTRUCTION LOANS

1. Submission Form

2. F1003 or Fannie Mae 3.2 file, or Personal Financial Statement

3. Recent Credit Report (<90 days)

4. 2 Years Personal & Business Taxes (if applicable)

5. Loan Summary with Detailed LOE for Cash Out & Exit Strategy

6. Development or Construction Costs Breakdown Sheet

7. Draw Schedule

8. Executed Purchase Contract for a Purchase

9. Contractor Resume

10. Recent Appraisal or Pictures with MLS Sold Comps – Future/

Completion Appraised Value

11. YTD Balance Sheet with YTD P&L for 1 year

REHAB LOANS

1. Submission Form

2. F1003 or Fannie Mae 3.2 file, or Personal Financial Statement

3. Recent Credit Report (<90 days)

4. 2 Years Personal & Business Taxes (if applicable)

5. Loan Summary with Detailed LOE for Cash Out & Exit Strategy

6. Investment Properties – Rent Roll or copy of lease(s)

7. Executed Purchase Contract for a Purchase

8. Recent Appraisal or Pictures with MLS Sold Comps – No Listed

Comps. Future Appraised Value

9. Rehab Cost- Breakdown

10. Rehab Draw