With the tightening of credit over the last nine months, what do find lenders are most focused on about borrowers, both positive and negative? What strategies have you found constructive to deal with the heightened scrutiny?
Clearly the credit worthiness and past performance. The glory days of old where you could pick up an investment property for zero money down are thankfully over. Its a back to basics approach which will benefit the industry in the long run.
I was chatting with the president of a local commercial bank yesterday and we spoke primarily about the current climate for construction financing. Construction loans are even less common today than acquisition loans primarily because it costs more to develop than to acquire existing right now so the demand for them is much less than it was a few years ago. That higher cost basis also makes it difficult to make the numbers work on new development loans.
For their part, the lender has to be able to reduce the "completion risk" of new development projects - i.e. they want to be sure the developer and his team can get the project from point A to point Z. If the developer/borrower doesnt have a long track record of success then it pretty much ends right there. Borrower's personal assets and liabilties (both current and contingent) are also heavily scrutinized. Bringing in a strong development team (lawyer, engineer, architect, contractor, etc.) with a proven track record and putting more equity into the deal is about the only way you can deal with this.
Assuming the numbers of the deal look good and there is solid market data to back up the proforma the lender will go to the next step and do an intense underwriting of the deal. If everything checks out they will make a loan commitment which is currently limited to around 60% LTV with a 2 to 5-year term. Cost of the commitment is 1% of loan amount with 50% due up front and non-refundable. Rates are 300bps over libor (which is currently only around 35bps) but they have a minimum loan rate of around 5%.
On a personal level, bankers make much of their total compensation based on the total amount of good loans they make so they are certainly motivated to lend responsibly. However, if they have a bad loan in their portfolio it could easily wipe out their bonus not to mention their job so I can understand why they are very cautious in evaluating the borrower and the deal itself.
With lenders being very tight with how they are lending money; how is a new investor able to purchase a property? Would most lenders accept 20%, 25% or more as a down payment? What other criteria would most lenders look at?
For what its worth... I have been kicking around the investment market before and now during the current downturn in the Southern California market..
I have found that investment deals are being underwritten with @ 65% - 50 % LTV ...
Traditional lenders are underwriting the deals based on the real estate and the tenant... Banks are really driving hard for business relationships with the Investors in order to lend ... other institutional lenders and secondary market lenders are merely looking at risk both as to the tenant and the real estate...