Are you thinking about taking out a loan to finance a house flip? Whether you are planning for today or in the future, you need to position yourself in a way that will make you an attractive, safe-bet to the lender. The better you look financially, the more a lender will negotiate with you to insure that you chose them as your lender.
At Rehab Financial Group, LP, we speak to people every day who want to do a rehab project, but have not prepared their portfolio in a way that shows a lender that they will be able to pay it back, and should therefore be approved for a loan.
We are constantly surprised by the callers we get with significant credit issues, lack of cash, or are unemployed. The potential borrower should put themselves in the lender’s shoes and remember approving a loan is a high stakes business decision. Especially consider that the bank, hard money or private lender does not make money when it makes a loan, it makes money when the loan is paid off. Lenders exist on cash flow and loans that do not pay off may impact the lender’s ability to make future loans and cause losses that far outweigh the income received on any particular loan.
Work on Your Credit
The first component you need to position in a positive light is your credit. Keep in mind that every time a credit issuer checks your credit score, your score will go down a few points. The more times your credit is checked, the more detrimental the effect will be. Accordingly, if you are thinking of applying for a mortgage loan in the near future, resist the urge to obtain additional credit cards and other consumer credit. Try to pay down some of your credit cards, as credit rating agencies also look at the utilization of your available credit in determining your score. The higher your balances, the lower your score will be.
As a general practice, the best way to protect a good credit score is to pay your bills on time. Late payments on any credit (credit cards, autos, mortgages) will hurt your score, but late payments on a mortgage loan will hurt the score the most. If you are thinking of applying for a rehab loan, create a six month history of timely payments on all loans, but especially any mortgage loans. Six months of unblemished recent history can do wonders in improving your score despite prior blemishes.
Have Rainy Day Fund
Other impediments to getting a loan may be your cash on hand and your employment status. Try to build up some cash to show the lender that you are responsible with money and will be able to meet the financial obligations that come along with a rehab loan. Monthly interest payments need to be made, insurance paid for, utility bills paid, etc.
There is no such thing as getting a loan without putting any of your own money in it, despite what others (who are not lenders) will try to tell you. At Rehab Financial Group we will lend 100% of purchase and rehab costs (up to 65% of after repaired value for qualified borrowers), but we require that you use your own money for closing costs and monthly payments. Other hard money lenders like RFG may have different requirements, but ANY legitimate lender is going to require that you have some of your own money in the deal.
Most lenders will ask you to submit recent bank statements for between three to six months. These statements should show a stable or increasing value. You will be asked to explain any large drop in cash on hand, the more recent the drop, the more detrimental it will be to your chance of approval. We have been told by applicants “I bought my wife a new diamond ring last month” and “I took my family to Disneyworld for a week.” While RFG is totally in favor of buying diamonds for a spouse and quality family time, we caution you to watch the timing of these events if you are looking for a rehab loan.
Have a Job, Just In Case
Lastly, unless you are sitting on a significant amount of cash, almost any lender, will require that you have income. We have been called by people who have no income, but may have $30,000 in cash that want to start rehabbing. Despite the fact that their credit is fine and cash on hand good, RFG will turn those borrowers down because they need that $30,000 to live on. What if the project takes longer than anticipated? What if the borrower does not make the amount on the project that they expected to? Such issues could spell disaster for the borrower, and losses for the lender.
In summary, if you have decent credit, build up your cash and have a job, you can position yourself to get approved for a rehab loan every time. It just takes a little preparation and strategy. If you’re serious about getting the loan, it’s worth the 6 months to a year it might take to build your portfolio. Be smart about your finances, and financing your rehab project should not be a problem at all.