Learn what lenders say are the three most important qualities in a borrower.
We’ve talked about what qualities you, as a borrower, should learn to identify in some of the country’s top hard money lenders—now let’s flip it around. What characteristics to hard money lenders look for in a borrower? What makes someone more or less attractive to a lender? Let’s find out.
Renowned investor Warren Buffett coined the term “skin in the game” and perhaps that’s more apt to say than “fully invested” in this scenario. Essentially, lenders want to know you’re committed and stand to lose a good deal if the project goes into default. This is why hard money lenders typically offer a lower loan-to-value (LTV) ratios than bank lenders because it ensures that the loan will have enough equity to be paid off in foreclosure, if necessary. If your own money comes up short, then we suggest finding another investor or partner to provide the funds for the down-payment. Sometimes, borrowers even show their contribution will be in the form of labor to renovate the property or perform other improvements.
Capacity to Repay
While bank lenders use your credit score to determine your ability to repay a loan, hard money lenders are much more likely to look at the income-producing potential of a rental property securing the loan or at the after-improvement value of a distressed property. Regardless of your credit score, what matters is that you show your lender that you have an exit strategy (see our previous blog on common exit strategies) and a plan to make your project profitable enough to repay your loan.
Motivation to Repay
To help secure and land deals borrowers love the speed at which hard money loans can be completed—however, they don’t always have the best interest rates. Needless to say, hard money loans for multifamily properties are generally pretty short in terms of length and one of the primary qualities lenders look for in a borrower is the motivation to repay quickly. Your exit strategy is important because lenders would like to turn around that money again to another borrower—rather than having it tied up in a foreclosed property for months or even years.
Okay, so you’re motivated to repay— but do you have the ability? Lenders also look into your capability to repay a loan beyond your credit score and will inquire about a detailed exit plan. Your credit score takes a backseat if you can concisely explain to your lender how you plan to make your project profitable enough to repay your loan.