There was a time, not long ago when private commercial mortgage loans, often called “hard money” loans were easy to get. Property owners who did not qualify for bank financing or who were under sever time constraints needed only to show that a building or tract of land had equity in it. Hard money lenders were happy to issue commercial mortgage approvals based on soft equity alone. Those days are long gone.
Private lenders are swamped with loan requests today. High quality borrowers with 7 figure net worths and strong balance sheets, unable to pry money from their bank anymore, are flocking to private financial entities for desperately needed funding. Thousands of excellent projects and great buildings are in danger of being lost to the credit crunch. Hard money lenders can afford to be choosy; only the best properties and the best deals are getting financed today.
If you want to guarantee a commercial mortgage loan approval for your purchase, refinance or construction project today, you must bring these three things to the table.
Lenders are looking for borrowers with a track record of success. First time developers or new investors will have to wait until this lending crisis blows over. Further, investors will need strong personal and business financials. Virtually all private commercial mortgage loans today now require the personal signature guarantee of the principle borrowers. Private lenders are just not offering non-recourse loans any longer, they will pass on any deals sponsored by weak or marginal borrowers.
Cash in the Deal
The days of 100% financing are over. Large seller 2nd mortgages are no longer allowed to cover a buyer’s financial commitment. It is imperative that borrowers bring real cash to a deal. The money can be in the form of a down-payment or a past cash investment in the property. Lenders will give credit for both hard and soft costs that have gone into a project, as long as it can be documented as actual, personal financial risk. LTVs (loan to value ratios) have plummeted lenders are no longer willing to take such a large share of the monetary risk. Borrowers that lack the ability or willingness to put their own cash on the line, need not even apply.
Payment Plan (debt service & exit)
Any borrower desiring a hard money loan has to be able to demonstrate an ability to make the mortgage payments during the life of the loan, and to pay the loan off at maturity.
This means that a building or development must produce enough cash-flow to make its own mortgage payments or the equity in the deal must support a large pre-paid interest reserve fund. In addition, there must be a viable exit strategy in place to assure the loan gets paid off at the end. The most common exit plans are refinance and/or property sale. Whatever exit plan is put forth, it must be shown to be realistic and achievable.
These three things are the fundamental elements that must be in-place to guarantee your project gets approved by a private, hard money commercial mortgage lender. Stick to buildings or developments you have experience in. If you don’t have the necessary experience then partner up 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 pay the lender back, during the life of the loan and at maturity. If you can definitively show that these factors exist, you will get approved and your deal will close.