How to Get More Dream Deals
In the April issue of Think Realty, Direct Lending Partners was a featured contributor, discussing the ins and outs of how to obtain the best loans for your real estate transactions. We will be discussing that article and delving into the two most important factors in getting more dream deals: knowing how lenders analyze borrowers and understanding how they structure loans.
As a private lender, we’ve always focused on educating our real estate investor clients and equipping them with the right tools and knowledge to get the very best deals possible. This education includes breaking down how lenders analyze borrowers and structure loans. Because lenders tend to vary in how they structure key components of loans, it can become a very confusing process for borrowers to navigate through and conduct a true comparison to another lender’s offer.
We’re going to sort through some of that confusion and help you determine how to get the maximum leverage along with the best rates and terms.
How Lenders Analyze Borrowers
With no true governing body like our residential mortgage counterparts, there really is no standardized approach when it comes to analyzing borrowers or deals. While residential mortgages through Fannie Mae or Freddie Mac have to adhere to a very specific set of guidelines and criteria, this approach is not the same in private lending.
Due to so many variables in private lending, it’s easy to see why it can be such a daunting task to understand what’s needed to get the best loan. However, there are three key components lenders look closely at in a borrowers profile:
Anytime you apply for investment loans, lenders will adjust the loan amount based on your qualifications, risks, and mitigants. In general, most private lenders in real estate will analyze these three factors:
Experience: The majority of private lenders will confirm that experience is the most heavily weighted factor during loan consideration. The level of experience a borrower possesses shows private lenders that you know how to execute and navigate deals. They want to see the number of real estate transactions you’ve completed in recent years and how well you’ve executed your business plan in past transactions, including how profitable those deals may or may not have been. Your experience level will help determine the type of leverage or rate structures available to you. For some lenders, they also apply a binary analysis of “experienced” or “not experienced” when structuring deals. If you’ve completed two to six deals per year over the last few years, you can typically expect max leverage.
Credit: Generally speaking, the better your credit score is, the better your rates, terms and leverage will be. Most lenders nationwide heavily consider your credit score to help determine your creditworthiness. Your ability to act responsibly and repay debt is looked upon favorably. While a “good” credit score is 670 or above, according to Experian, most lenders’ minimums are actually in the range of approximately 600-620. However, more regionalized hard money lenders often focus more on your experience and liquidity, and might even disregard your credit score altogether.
Liquidity: A private lender will want proof of how much money you have access to in your business and personal accounts. Your liquidity helps demonstrate an ability to contribute to the acquisition of a property while also ensuring your project is properly capitalized. For example, when you go through a private lender for a bridge loan, they are going to want to see evidence that proves you have the capital for any monies that will be due at closing, as well as a reserve that covers at least half the payments of the full loan term.
Ultimately, you’ll need to understand that there is a trend towards more consistency due to investment banks, having seen the massive success of private lenders, entering the game. It’s led to the securitization of fix-and-flip loans (also referred to as residential transition loans). What this securitization means is that large pools of loans are consolidated and then sold to institutional investors. These institutional investors (purchasers) will not buy these loans without a third-party assessment of risk, which has led to agencies like Morningstar Credit Ratings to develop specific criteria to help rate fix-and-flip securitizations. With credit rating agencies now beginning to rate real estate loans from private lenders, it’s created a need to standardize the underwriting process. In order to attract Wall Street investors, these loans must meet certain criteria.
So, what does this mean for you?
It just means that as you move forward, where you’re getting your loan can help shed a little light on the overall borrowing process. For private lenders who balance sheet and hold their loans, you’ll see that their guidelines are more discretionary and proprietary. With a private lender who sells their loans, you’ll find that their underwriting guidelines actually must conform to those of their purchaser’s guidelines. This means that those lenders may not be able to use as much discretion when making underwriting exceptions.
How Lenders Structure Their Loans
Now that we’ve gone over the ways in which lenders analyze borrowers, let’s take a look at how they structure those loans for each asset. We’re going to help illustrate how to get max leverage on your real estate deals.
Lenders will typically view a loan structure from a “cost” or “value” perspective. So, in order for them to structure real estate loans and determine the exact loan amount, they are going to examine one or more of the following three ratios:
Lenders prefer to see some “skin in the game” because your willingness to commit your own money towards a project means lenders take on less risk — statistically speaking. Keep in mind, they’ve seen all the data from the years leading up to the Housing Crisis. They know that the lower the down payment, the more likely a default will occur.
Understand that if you’re seeking max leverage in scaling your real estate operations, private lenders will use the lesser of two calculations when determining your loan size. For example, let’s say your LTC structure loan is $210,000, the ARV is $280,00, and based on the factors above, you’re only able to go up to a max ARV of 70%, then your loan sizing is going to be restricted by AVR due to it being the lesser of the two structures. You would only get a loan in the amount of $196,000.
During the underwriting process, lenders may also change the leverage on a loan based on items specifically related to the asset. This could include the amount of rehab required versus the actual purchase price and/or restrictions due to geographic regions or asset types. There are many more factors that could impact leverage, but this would take up an entire article, so we listed some of the more common factors.
Getting the Best Loan for Your Real Estate Operation
While there is no way to create a one-size-fits-all formula to help you get you more dream deals, you can definitely increase your odds of maximizing leverage by simply knowing how private lenders tend to operate.
As you continue building your real estate portfolio, please pay close attention to your borrower profile. Your real estate portfolio should serve to demonstrate that you can execute and have the experience to handle your investments. When applying for a loan, always be prepared and never be afraid to ask questions. Your lending specialist is there to serve you. When lenders begin to see that you have the experience, you’ve done your due diligence to analyze costs of a deal, and have the funds on hand to proceed, you’ll find yourself in a great position to get max leverage with desirable rates and terms. Check out the full article on Think Realty, “Talking Loudly: More Dream Deals”.
Want to learn more about private lending? At Direct Lending Partners, we’re here to help. Call us at or send us an email today, or click the link below!