At the beginning of April 2020, nearly every country in the world is experiencing the impact of the spread of the COVID-19 virus, taking a human toll in lost lives and an economic toll as the global economy has essentially been shut down to slow the spread of the virus. As I wrote yesterday, the residential mortgage industry has changed significantly in the last thirty days. Hard money lending saw significant changes in March. But, hard money lending is not dead. In fact, loans are still funding. This post will let you know what it takes in obtaining a hard money loan during COVID-19.
Though hard money lending is still flowing, loans are not flowing like they had been at the beginning of March. Lenders are cutting back to fund only the best quality loans to the most qualified borrowers. Property Valuations and Loan-To-Value (LTV) ratios are being cut by 5-10% of where they had been in February due to the uncertainty of how deep the COVID-19 recession goes. Nobody knows how much economic and real estate deflation could happen in the months to come, so they are proceeding with caution.
Obtaining a Hard Money Loan During COVID-19
To borrow hard money, you need to be “strong to quite strong” in the areas of personal credit, real estate experience, and have significant liquidity. The strongest borrowers will be able to obtain hard money loans during this time.
For house flipping, the lenders First Capital Trust Deeds funds fix and flip financing through have all adjusted their guidelines requiring an extensive track record, more liquid assets, and the ability to ride out an extended downturn in the market.
FCTD recently had new applications come in from borrowers who normally wouldn’t use hard money but their primary funding sources either stopped funding or have drastically reduced guidelines that proved to be prohibitive for the borrower. Bank borrowers may take out more hard money loans as banks cut back on new loans while increasing loan loss reserves for future defaults.
Properties in urban and suburban areas are expected to hold their value the most due to demand for housing in these locations. FCTD expects to fund the majority of loans in major markets on the west coast, primarily near Interstate 5, including:
- San Diego
- Los Angeles
- Orange County
- San Jose
- San Francisco / Oakland
Location will be key for the hard money loans that fund during Q2 2020. Lenders will likely steer clear of loans in rural areas because those areas tend to see prices fall further and take longer to recover than higher density locations due to a less economic activity to lift property values.
Loan Characteristics (Loan Amounts, LTV, Etc.)
As mentioned above, lower LTVs are to be expected. Where FCTD used to be able to secure 65% LTV on a bridge loan during the last five years, borrowers can expect 50-60% LTV as the range where bridge loans will fund during Q2 2020.
Blanket loans, commercial loans, and second mortgages will be in the 50-60% LTV range. We think that 50-60% will be the standard LTV threshold this quarter for most hard money loans besides construction and fix and flip loans.
Construction loans are still funding for financially strong borrowers on projects in desirable locations (I-5 corridor cities). Borrowers will need to contribute more to the cost to build. Loan-To-Cost (LTC) levels will be lower going forward than they had been during the past few years.
Fix and flip loans at the time of this writing are capped at 70-80% LTV on the purchase. For 80% LTV fix and flip loans, some lenders are requiring a 12-month interest reserve, which means that the lender will set aside 12 payments into a sub-escrow account to guarantee the borrower makes all the payments. For the rehab portion of a fix and flip loan, most lenders still lending will do 100% of the rehab budget.
Maximum loan amounts have come down over the last 30 days. Some of FCTD’s go-to fix and flip lenders, who had been lending up to $10,000,000 on a loan, have reduced their maximum loan amount down to $3,000,000. Some lenders, such as individual trust deed investors or family offices, have reduced their maximum loan amounts due to not knowing when their outstanding loans will be paid off. They are choosing to keep more cash on hand and therefore will only lend at lower amounts until they start receiving payoffs from refinancing or the sale of a property by their current borrowers.
What to Expect
Obtaining a loan during COVID-19 will be different than borrowers have been accustomed to over the past five years. Prime borrowers who had borrowed from banks will likely borrow hard money more than before. The strongest real estate investors with properties near the I-5 corridor will be able to borrow hard money at 50-60% LTV while experienced house flippers will still be able to buy and sell properties. Lenders will be more selective seeking out the best credit risks to ensure they issue loans that will be repaid. But, hard money loans will still be funding during the COVID-19 recession. If you are in the market for a hard money loan, contact First Capital Trust Deeds so can help you explore the current options.