There was a time, not long ago, when private business home loans, often called “hard money” loans, were easy to obtain. Property owners who did not qualify for bank financing or who were under severe time constraints only needed to show that a building or piece of land had equity in it. Hard money lenders were happy to issue commercial mortgage approvals based only on soft capital. Those days are long gone.
Private lenders are inundated with loan applications today. High-quality borrowers with 7-figure net worths and strong balance sheets, unable to get more money out of their bank, flock to private lenders for the financing they desperately need. Thousands of excellent projects and large buildings are in danger of being lost due to the credit crunch. Hard money lenders can afford to be picky; Only the best properties and the best deals are financed today.
If you want to secure approval for a commercial mortgage loan for your purchase, refinance, or construction project today, you need to bring these three things to the table.
strong patronage
Lenders look for borrowers with a track record of success. First-time developers or new investors will have to wait until this credit crunch passes. Additionally, investors will need strong personal and business finances. Virtually all of today’s private commercial mortgage loans now require the personal signature guarantee of primary borrowers. Private lenders simply no longer offer non-recourse loans, they will pass up any deal sponsored by weak or marginal borrowers.
Cash on the deal
The days of 100% financing are over. Second mortgages for large sellers are no longer allowed to cover the buyer’s financial commitment. It is imperative that borrowers bring real cash to a deal. The money can be a down payment or a previous cash investment in the property. Lenders will extend credit for direct and indirect costs incurred in a project, as long as it can be documented as actual personal financial risk. LTVs (loan-to-value ratios) have plummeted and lenders are no longer willing to take on as much of the currency risk. Borrowers who lack the ability or willingness to put their own cash on the line don’t even need to apply.
Payment plan (debt service and exit)
Any borrower who wants a hard money loan must be able to demonstrate the ability to make the mortgage payments over the life of the loan and to repay the loan at maturity.
This means that a building or development must produce enough cash flow to make its own mortgage payments or the principal in the deal must back a large prepaid interest reserve fund. In addition, there must be a viable exit strategy in place to ensure that the loan is eventually paid off. The most common exit plans are refinancing and/or property sales. Whatever exit plan is presented, it must be shown to be realistic and achievable.
These three things are the building blocks that must be in place to ensure your project is approved by a big money private commercial mortgage lender. Stick to buildings or developments where you have experience. If you don’t have the necessary experience, then partner with someone who does. Bring your own money to the table; put your own cash on the line. And make sure your deal can realistically repay the lender, over the life of the loan and at maturity. If you can definitely show that these factors exist, you will get approval and your deal will close.
