The “5 C’s of Credit” are the five key elements a borrower should have to obtain credit. These same 5 “C” items are critical for Hard Money loans as well as conventional loans. Successful Mortgage Brokers understand the 5 C’s of Credit and know how to apply their scenario to a conventional or hard money lender. Good Brokers understand the loan scenarios viability against the 5 C’s and develop their “go to” loan programs and lenders. Understanding the nuances of these 5 C’s into Hard Money will save a broker’s time and increase his chances of getting the loan funded.
Whether the loan is a Jumbo, FHA, Freddie Mac, Fannie Mae, ARM or Fixed, good mortgage brokers evaluate a loan scenario and typically know where to take that loan to get it funded. Quality Mortgage Brokers constantly learn about new lender offerings and know the underwriting, timing and processing capabilities of their lenders or correspondents. In simple terms, smart conventional mortgage brokers know the guidelines on what it takes to get a loan funded and where to take the loan.
These same Mortgage Brokers that want to increase their income and leverage their marketing investments develop relationships with their preferred Hard Money Lenders and know how and when to submit a Hard Money Loan Scenario. The 5 C’s are a great place to start when evaluating the merits of a loan. Below are the 5 C’s of Credit applied to Hard Money:
- Capacity – Sufficient cash flow to service the obligation. In current lingo, the Ability to Pay “ATR” rules apply. While conventional lenders review tax returns and a hard Debt to Income Ratio “DTR”, Hard Money lenders can use income on bank statements, “stated” and self-employed income.
- Capital – Net Worth is a broad definition but in hard money, this characteristic refers to “Equity” in the property or the Down Payment. Typically Hard Money lenders want the borrower to have at least 35% equity.
- Collateral – The assets to secure the debt. For Real Estate Hard Money loans, the collateral is the real estate. SFR’s, Multi-Family, Office, Industrial, Retail all have different economics and require specialized underwriting. The liquidity of the collateral is paramount to the pricing and type of hard money available.
- Condition – The borrower’s need, situation, loan purpose, micro and macro-economic conditions and the exit strategy all factor into this “Condition” characteristic. A valid exit strategy whether refinance or a sale of the property should be available at loan maturation. Typically the loan purpose will need to be for business or investment as opposed to a consumer orientation.
- Character – Borrower character is paramount to a successful hard money loan. Is there a criminal record? Is the borrower litigious? What is the borrower’s credit and payment history? Explanation for bad credit?
Hard Money loans are all unique but do carry similar yet nuanced credit analysis characteristics compared with conventional loans. How do you apply the 5 C’s of Credit in your business? We would like to know. Please submit a post on our Mortgage Vintage, Inc. Facebook Page or our LinkedIn Company page. If you enjoy discussions like this, please sign up for our Linked in Group called Southern California Trust Deed Investment Group or Mortgage Vintage’s CrowdTrustDeed Group.