TIPS FOR LENDERS AND PRIVATE INVESTORS
Private lenders bore the brunt of the property bust due to the bad credit underwriting that was prevalent in the boom era. All that mattered was the low loan-to-value (LTV) ratio. 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 the real estate property. For example, if a borrower borrows $100,000 to buy a $120,000 home, the LTV ratio is $100,000/$120,000 or 83%. This example shows a relatively small equity margin (17%) that would disappear in the event of a foreclosure. The lender may never fully recover the loan from the foreclosure proceeds, as shown below.
Loan balance – $100,000
Late payments; principal and interest – $10,000
Foreclosure, Legal Fees – $7,000
Miscellaneous expense – $8,000
Total owed – $125,000
Foreclosure Sale Price – $90,000
Loss to the lender – $35,000
Prudent loans require a lender to analyze the borrower’s ability to pay in addition to taking adequate collateral and considering a much smaller loan online with a low LTV ratio. Conventional lenders insist on a maximum LTV of 80% (also the regulator’s maximum LTV requirement) and 1.20 times the debt service coverage ratio. Private lenders, however, look for a maximum LTV of 65% and do not take DSCR into account. There is the problem. A loan that subsequently defaults a few months after disbursement continues to attract interest and late fees, eroding collateral coverage. On the other hand, a borrower whose DSCR is strong from the start is unlikely to fail to make payments for at least several months after disbursement.
As a private lender, you need to ask yourself and be satisfied with the answers to the following key questions, then gather your loan documentation and get a credible credit underwriter to review loan applications for you.
- Who is the borrower and what is the borrower’s credit history?
- What is the borrower’s share in the deal? It’s appropriate?
- What is the borrower’s ability to pay? From what sources?
- What is the guarantee and the LTV that is committed?
- What are the prevailing economic conditions and others that pose risks?
The following are the minimum documents you want to collect for loan analysis and underwriting:
INTENTION LETTER
1. Loan Summary/Submission Form – including loan details, debt
service and exit strategy
2. File F1003 or Fannie Mae 3.2, or Personal Financial Statement
3. Recent appraisal or photos
4. Recent credit report
LOAN SUBMISSION (Loan Package)
RESIDENTIAL LOANS
1. Submission form
2. File F1003 or Fannie Mae 3.2, or Personal Financial Statement
3. Recent credit report (<90 days)
4. 2 years of personal and business taxes (if applicable)
5. Loan summary with detailed LOE for withdrawal and exit strategy
6. Investment Properties – Rental Roll or copy of lease(s)
7. Purchase Contract Executed for a Purchase
8. Recent Appraisal or Images with Sold MLS Offsets – No Offsets Listed
MULTI-FAMILY LOANS
1. Submission form
2. File F1003 or Fannie Mae 3.2, or Personal Financial Statement
3. Recent credit report (<90 days)
4. 2 years of personal and business taxes (if applicable)
5. Loan summary with detailed LOE for withdrawal and exit strategy
6. Rent Roll 6 months follow-up
7. Purchase Contract Executed for a Purchase
8. Recent Appraisal or Images with Sold MLS Offsets – No Offsets Listed
9. Construction of YTD and Personal balance with YTD P&L for 2 years
COMMERCIAL LOANS
1. Submission form
2. File F1003 or Fannie Mae 3.2, or Personal Financial Statement
3. Recent credit report (<90 days)
4. 2 years of personal and business taxes (if applicable)
5. Loan summary with detailed LOE for withdrawal and exit strategy
6. Rental Roll or copy of the lease agreement(s)
7. Purchase Contract Executed for a Purchase
8. Recent Appraisal or Images with Sold MLS Offsets – No Offsets Listed
9. Construction of YTD and Personal balance with YTD P&L for 2 years
CONSTRUCTION LOANS
1. Submission form
2. File F1003 or Fannie Mae 3.2, or Personal Financial Statement
3. Recent credit report (<90 days)
4. 2 years of personal and business taxes (if applicable)
5. Loan summary with detailed LOE for withdrawal and exit strategy
6. Development or Construction Cost Breakdown Sheet
7. Draw schedule
8. Purchase Contract Executed for a Purchase
9. Contractor’s resume
10. Recent Appraisal or Images with Sold MLS Comps – Future/
final appraised value
11. Balance YTD with P&L YTD for 1 year
REHABILITATION LOANS
1. Submission form
2. File F1003 or Fannie Mae 3.2, or Personal Financial Statement
3. Recent credit report (<90 days)
4. 2 years of personal and business taxes (if applicable)
5. Loan summary with detailed LOE for withdrawal and exit strategy
6. Investment Properties – Rental Roll or copy of lease(s)
7. Purchase Contract Executed for a Purchase
8. Recent appraisal or photos with comps sold from MLS – Not Listed
offsets Future Appraised Value
9. Breakdown of rehabilitation costs
10. Rehabilitation raffle