Excuse me, Could You Tell Me What the Heck is Going on with Real Estate Finance Right Now?

Posted By: Justin Cooper ICOR Blog & News ,

“Yes, we are still lending.”

“No, our loan terms have not changed.”

“Yes we can save your deal and still get it funded.”

“No, you are not the first person I have talked to today asking these exact same questions!”

I lost count that first week of how many times I had that same conversation. National lenders were
shutting down left and right, other lenders were radically changing their terms and some were simply
not returning phone calls. As the world was changing due to the Coronavirus, so was the real estate
financing world.

As a hard money lender, we focus on high leverage loans to real estate investors and we need to move
quickly to get deals funded. We like to lend the full purchase price, repairs and even the closing costs on
the right deals. We have been able to maintain that, helping investors of all shapes and sizes through
this new world but obviously not all hard money lenders can say the same. Some lenders closed
completely. Some lenders stopped making loans for several months. Other lenders revised their loan
terms, meaning they lowered LTV’s and the amount investors could borrower and still others adjusted
the personal qualifying, like requiring more liquidity or cash in the bank or down payments.

The world has also been changing for conventional lenders and local banks as well.

Conventional lending rates are at all-time lows. I know that is something we have been saying for years,
but again, it is true. This seems to have been fueled by the stimulus from the government as well as the
Federal Reserve buying bonds. The all-time lows have prompted seemingly record amounts of
refinances and have helped stimulate more house buying as well as seeming to prop up values as folks
can qualify for larger loans. That being said, qualifying for these loans has gotten more difficult.


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FHA credit requirements have not changed much, but the banks that make the loans are adding in more
overlays requiring higher credit. The minimum is a 500 score per FHA, but where banks used to have
overlays requiring a 580 score, they are now requiring scores as high as 640. Reserve requirements have
also been going up. Instead of requiring only 2 months of payments in reserves, these have increased to
6 months in most cases, and I just saw they could be as high as 18 months! Some banks are even
requiring pre-payments of several months. This could be due to the recent forbearance agreements
folks have been entering into. The rules for the banks have changed with the allowance of forbearance
and the banks have certainly passed those savings on to us. One of the often-overlooked points of these
forbearance agreements is the hit your credit could take. If you have entered into a forbearance
agreement, then it will be very difficult for you to get any kind of loan until the forbearance has been
worked out.

In certain circumstances, banks and lenders have lowered DTI’s (Debt to Income Ratio) to 40%,
increased credit score minimums to 700 and folks must put at least 20% down!

Self Employed folks are up against much stricter guidelines as well. They must produce 2 years of tax
returns, Year-To-Date Profit and Loss statements (possibly needing to be audited) and 2 months of bank
statements, and you can bet that those bank statements will be scrutinized, as well as the viability of the
business moving forward.

Jumbo loans have also been affected. Where jumbo loans used to require a minimum of 10% down, now
they require a minimum of 15% down.

Every local bank operates independently, which of course is one of the reasons we like them, meaning
they do not have to follow all the same rules and guidelines. One of the major rules local banks do have
to follow is maintaining a certain level of liquidity. For the most part, banks have stayed true to this and
have been positioned well as opposed to what we went through a decade ago. That being said, they
have also been making adjustments. The banks I have relationships with are keeping a close eye on the
future. They have not seen a huge delinquency rate but have been making changes to keep themselves
in a good position. Some of the changes they have been making are:

  • Ceasing all HELOC’s (Home Equity Line of Credit)
  • Reducing LTV’s (Loan to Value) on HELOC’s
  • Reducing their appetite on spec builds (new builds), and
  • Reducing the LTV’s on cash-out refinances.

This is an ever-changing market and world we are living in and the financing aspects are changing every
day. We must keep our ears and eyes open as businesses run out of PPP money, as the unemployment
support changes, forbearance comes to an end on mortgages and the possibility of the distribution of
another stimulus. These, and several other factors will all be part of the ever-shifting finance landscape
and each of these could/will have an impact on our investing. There will be opportunity for us as
investors to capitalize on this, as well as to help folks in need. If you would like to talk about any of this,
I would love to hear it!