A good joke is always fun during the Holidays. Have you heard the one about the two people who were about to do a Real Estate Deal? One person had all the money and the other person had all the experience. Well guess what happened after the Deal happened? The person with the money ended up with the experience and the person with the experience ended up with the money!
After 10 years of underwriting we are continuing to gain experience. I don’t think our learning will ever end. This month’s Holiday Blog discusses the “12 Days of Hard Money Underwriting” and explores some of the not so obvious “lessons learned” during our due diligence on close to 500 originated loans at Mortgage Vintage, Inc.
- Borrower Character Matters: While equity in the property is paramount, the borrower character matters. FICO, background, propensity to litigate, family and the borrower meeting are important determining factors on a loan.
- Ocean Views Don’t Matter: I think Loan to Value, liquidity and equity protection are the most important underwriting elements. Some of our lenders have criteria for Trust Deed investment that says, “if I get the property back, I need to be able to live in the property”. While I understand this perspective, I don’t embrace it.
- The More Construction Required, the More Risk: A loan on a house that has already been remodeled has less risk than a house that needs a major rehab. A ground up construction project has more risk than a remodel.
- Credit Scores Are Not Created Equal: Low FICO’s created by single events that happen like a medical situation or a loss of a job should be treated differently compared to someone who can’t manage their financial life and pay their bills on time.
- The Scenario Matters: Hard Money loans are “Story” loans. Why the person needs the money and why the person or property does not qualify for a conventional loan are important considerations. The key is that the story must add up and be verifiable.
- If It Sounds To Good To Be True, It Probably Is: From valuations to income to credit, exaggerations happen and need to be checked out.
- Watch Out for the “Big Hat No Cattle” Borrowers: We’ve all met the boastful types. Careful! Make sure the Porsche that the borrower drove up in is not leased for the day!
- Always Get a 3rd Party Opinion on Values: I have learned that there are many data points that make up property value. While Comps, property visits, Zillow, Redfin and AVM’s are all data points, a 3rd party Appraisal or Broker Price Opinion from a knowledgeable, local source is always the best data point.
- Think Twice About Lending to a Borrower with Previous Lender Law Suits or Loan Modifications: Enough said.
- There is a Reason for 65% LTV/CLTV on Refi’s and 70% LTV on Purchases: I have been down the Foreclosure, Bankruptcy and REO path and the equity protection provided by these LTV’s is needed to maintain the required yield
- Liquidity drives LTV Loan Parameters: Residential is the most liquid asset which makes a higher LTV viable. Multi-Family, Industrial, Office, Retail Land are in order from most to least liquid. Cost to improve and sell also factors in.
- Underwriting is more Art than Science: The Scenarios we see on a day to day basis are each unique in their own way and require a combination of the above underwriting and other factors to determine loan suitability and approval.
Download this blog post here 12 Days of Hard Money Underwriting