Having Adequate Cash Reserves
Your Cash Counts
Having adequate cash reserves is essential to getting a loan approved by both traditional lenders and private lenders. RFG has recently received several applications from potential borrowers, who, although otherwise qualified, do not have enough cash on hand to get their loan application approved. In addition, there have been a few borrowers with complicated cash situations, as discussed below. As has been written in prior RFG blogs, when applying for rehab loans, it is very important to have all of your financial information in order ahead of time, including your cash situation.
Most lenders, including RFG, will not finance your closing costs and expect that monthly payments will be made. Therefore, it is essential that the lender see that the borrower has sufficient cash on hand to get the transaction closed. A lender will also question a borrower’s ability to make monthly payments, if they have been unable to save money in a significant way when contemplating taking out a rehab loan.
Many borrowers tell us that they have significant cash in a business that is not part of the loan or “under the mattress”. A lender cannot rely on these funds because they really do not know where the funds are coming from, or if they even exist at all. A borrower contemplating doing a rehab (or most other kind) of loan, needs to put that money in a financial institution where the lender can see it a few months before the loan application.
We are now working with a borrower who has little cash but owns gold and silver that he says he will liquidate prior to loan closing. The problem was, we had no idea what the gold and silver was worth. We asked the borrower to have an appraisal done on the liquidation value of the precious metals. Once received, we were more confident in the borrower’s ability to close the loan and make the payments.
Some of RFG’s borrowers have been successful in wholesaling properties in order to build their cash reserves prior to doing their own projects. This has shown to be an effective way to create cash outside of a borrower’s regular paycheck. In addition, some borrowers are very careful to deposit bonuses and commission checks in full into separate accounts to be able to show the cash necessary to take out a loan. The key is to do whatever works for you to put the cash somewhere you will not spend it.
We recently had a borrower that had sufficient cash to close when he first applied to RFG, but by the time he got a property under contract, he had significantly less cash than when he started the process. When asked, he said he spent $15,000 on a new diamond ring for his wife. However sweet and romantic this may have been, it used almost all of the cash he had and led to RFG having to deny the loan.
The key is, get your cash and other assets in order, and keep it that way. There are few things that make RFG happier, than a few months of solid, consistent cash on hand!