When a real estate investor applies for a loan, the underwriter has to make a determination on whether that real estate loan borrower, and the property he intends to finance with a loan, is a good risk. The loan itself is an investment in the borrower as much as it is an investment in the property. For that reason, the lender needs some way to ensure that the borrower has a reasonable chance and the intent to pay back the loan so that investors putting the money up for the loan see a return on their investment. The underwriting process is the path that lenders take to make a risk determination.
Below are five traits lenders like to see in a borrower that could mean that borrower is a good credit risk for a real estate loan.
High Credit Score Means Lower Risk Profile
There are many criteria that affect a person’s credit score. Rather than examine each one of those criteria individually, the lender can get a general sense of a borrower’s credit history by simply pulling his credit score. If the borrower is an individual, the credit score will be his personal FICO score. If the borrower is an institution, then it will be a business credit score. Either way, a sub-prime credit score does not necessarily mean a rejection or denial of a real estate loan. It could mean a higher interest rate on the loan as a lower score generally means a higher risk profile.
Track Record of the Real Estate Loan Borrower
Another characteristic of a good real estate loan borrower is a good track record in real estate investing. A first-time borrower is generally seen as a higher credit risk because of the absence of a track record. By contrast, a real estate developer with 100 successful deals under his belt will be viewed as a successful developer who understands the risks associated with each property and how to handle cash flow and expenses as well as how to manage a property investment. To drill down even further, the real estate lender may want the borrower to have a positive track record in the specific type of real estate investment borrowed against. For instance, if the loan is for a commercial rehab property, then a handful of successful commercial rehab property investments under his belt will go in the borrower’s favor.
Investor Must Have Real Estate Experience
General real estate experience is also helpful. An investor with 10 years experience in real estate is a better risk than someone with no experience. A veteran real estate agent managing her first single-family property rehab might be a better risk than a development apprentice going it alone for the first time.
Good Judgement of Real Estate Investments
The only way a lender has to judge a borrower’s judgment regarding investment properties is to take a look at the investment property for which the borrower is seeking a loan. To that end, the lender will want to see a property appraisal, look at how much rehab is necessary, and determine a commendable LTV in the investment property itself. If the investment property checks out as a good investment, then that lowers the risk profile for the real estate loan borrower.
A Personal Guarantee of the Loan Borrower
Not every borrower can give a personal guarantee. Every financial situation is different. Some investors have collateral, others use the investment property itself as collateral. In some cases, a real estate loan borrower has enough cash reserves to make a personal guarantee on the loan amount they are borrowing. In that case, it substantially lowers the risk profile for that real estate loan borrower since, if the investment property isn’t completed or the investment fails for any reason, then the borrower’s personal income is on the line. The lender has a guarantee that their investment is protected. These are just five criteria lenders consider when deciding to fund a borrower’s request for a real estate investment property. Lower your risk profile and you’re more likely to get the money you need for your investments.