Tips for Getting Approved For a Private Loan in an Uncertain Market
As the world adjusts to life during a pandemic, we at Rehab Financial Group are still open and funding loans for our investors. From our perspective, this crisis is different from the 2008 recession. This is a health crisis with an economic impact, this is not an economic crisis fueled by an unstable housing market. The housing market will be impacted but not to the extent of 2008. Employment, wages, the stock market, and ultimately, consumer confidence will all take time to recover and no one has any view of certainty. However, our view is that it will bounce back, as it always does.
While weve made a few minor changes, we are operating as usual. RFG started by funding loans with our personal money, so weve always been focused on the fundamentals: being prudent and careful, solid underwriting, and making common-sense loans to benefit safe borrowing and real estate investing. To that end, weve written this article to help you understand how to obtain approval for one of our loans, and what you need to consider when doing so in the current uncertain market.
Do I qualify?
The first step is to look at our list of qualifications to ensure that you meet the basic eligibility for one of our loans. To take out a loan from Rehab Financial, you need the following:
- A credit score of at least 620
- Enough cash for closing cost plus 6 months of interest reserves
- Documented income sufficient to make the rehab loan payments
- An identified 1-4 unit non-owner occupied residential property
- No bankruptcy or foreclosure proceedings within the prior three years
- Legal residency in the United States
- Your primary residence is within 60 miles of the collateral property
- A positive history of making mortgage payments
- A financial position that makes sense when looked at as a whole
Tip #1: Have adequate cash flow
The main criteria we use to determine loan eligibility is your cash flow. We compare your income to your expenses and look at the cash you have on hand to ensure you will be able to make your payments.
In light of COVID-19, we have increased the amount of cash people need on hand, but ultimately we apply much of it toward advanced payments. Depending upon the loan amount, were looking for a minimum of $20,000 cash on hand. With this example, a third or up to one half of that cash will go toward advanced interest payments. This amount is only a guideline to explain what the minimum is.
Your necessary cash on hand will be affected by the size of your loan and your other financial information, as there needs to be a consistency between all of your financial information. You should always provide us with information on all of your assets, to make it easier for us to make a decision as quickly as possible.
We also take into account your income compared to your outgoing expenses (aka, your debt to income ratio, or DTI), but we dont have hard rules like banks do. Ultimately, the ratio has a different meaning depending on the income level. Someone with a 60% DTI and $50k annual income is in a much different situation than someone with a 60% DTI and $150k annual income, and we take such things into consideration, unlike banks.
It all comes back to: what is the common-sense decision? Were in this for mutual benefit you get the loan you need, and we get paid back.
Tip #2: Come prepared for the initial call
Its always important to come prepared for your first contact with us, to make sure everything operates smoothly and quickly. We will always need a quick summary about you and your real estate endeavors. Expect the call to take about ten to fifteen minutes and come with decent information about the following:
- Total amount of liquid assets & assets overall
- Your credit report and score
- Your annual income
- Previous real estate experience
- Purchase price (or desired loan size to cover you purchase & rehab)
- Renovation estimate (or desired loan size to cover you purchase & rehab)
- Estimated After Repair Value (ARV)
No need to stress if youre missing a piece of information or are unsure about your numbers. Our knowledgeable and friendly loan consultants are there to help.
Tip #3: Do your homework
While its always important to do your due diligence, in this uncertain market its more important than ever. You need a thorough understanding of the market you are looking to buy in.
As things currently stand, youll need to do a deep dive into your prospective market, understanding every nook and cranny of the current picture in that city, county, and state. What restrictions are in place? What types of businesses are open? Are contractors allowed to work currently? Are government offices open and functioning? Would you be able to obtain title insurance? Stay up to date on local news and government announcements and make sure you can know immediately when things change.
As always, youll also need to do your homework on your desired property. Youll need an estimation of the potential value, doing the math and projections to figure out what the real value of the property will be after rehab. Ultimately, youll want to know what your potential profit margin will be. Our calculator will help you crunch the numbers.
One thing to consider during a crisis like this is that if youre looking to buy, you have way more leverage and negotiating power than usual because so few people are buying. You can use this to your advantage to find a property that, under usual circumstances, might be out of your range.
Tip #4: Know your exit strategy
Flip? Or rent? This is another point that is always applicable, but is even more important to tackle strategically right now. You should never take out a loan without a viable exit strategy, and with circumstances as they are this summer, your exit strategy may be affected.
In the coming months, flipping will be a little harder. Summer is usually the buying season, and while the industry is still operating with virtual open houses and no-contact paperwork drops the sales volume wont compare to a typical summer. In general, our view is that the buying season will be delayed two to three months. However, this gives you time to rehab over the summer and have a refurbished property up for sale right at the time that buying should be picking up.
There are other options, of course. If you have the cash up-front, it could be worth paying for your desired property in cash right now, sitting on it for a bit, and then coming to a lender like us to reimburse you and fund your rehab. Theres also the option of investing in rental properties, similar to the moves many investors made in 2008. Fewer people buying means more people renting, so the rental market is looking like a good investment for the immediate future.
Back to the basics
In the words of our founder, Susan, its now time to get back to the basics of funding and lending. Be prudent and careful. Educate yourself as much as possible on the industry, your market, and the news. There is a great opportunity out there, we just have to be willing to look for it.
If youre ready to apply, here is our step by step guide to borrowing a private loan from RFG.