So, you’re a mortgage broker and your client needs a short-term bridge loan. You’ve scoured the broker options, talked to your network, and finally landed on private money as the way to go (because maybe it’s the only way to go).
But wait. Before you send that loan request and start dreaming of your commission check, let’s break down how private money lenders (aka your potential golden gooses) decide whether to say “yes” or “no” to a loan.
There are many who may wonder, “What do these lenders really want?” or “How can I make sure my loan request doesn’t end up in the trash?” What follows is a discussion of how private money lenders evaluate short-term bridge loans and how you, dear mortgage broker, can set your client up for success.
Magical mark
Private money lenders love safety nets. Their go-to safety net is loan-to-value (LTV) ratios. The lower the LTV, the happier they are. Think of LTV as the cushion that keeps them safe when a borrower trips and falls (i.e., defaults). Ideally, most private lenders won’t lend more than 65% of the property’s value. If your client’s property is worth $1 million, expect many private lenders to cap the loan at $650,000.
But here’s an important rule to keep in mind: If your borrower is willing to cross-collateralize (in other words, offer up additional properties as security), you might see that LTV drop below the magical 65% mark. Suddenly, your borrower’s 70%, or maybe even 100%, LTV loan request could be green lit if the combined loan value is below 65% LTV. That’s why, when submitting a loan request, it’s always helpful to ask your client: “Do you have any other properties you’re willing to toss into the mix?”
Pro tip for brokers: Always send details of additional properties if your client’s LTV is tight. Private lenders love options. You’re essentially sweetening the deal, which means a better chance for approval — and more money in your pocket. ⊲
Property Condition
Private money lenders like shiny things — or at least well-maintained things. They’re not looking for a haunted mansion or a fixer-upper that’s one gust of wind away from being a teardown.
The exception is a deal that is a renovation loan where the funds to renovate the property are held back in a lender-controlled escrow account. But when it comes to giving cash or refinance loans without a construction holdback, where a portion of the payment to the contractor is withheld, lenders tend to want properties in good condition, especially if your client’s LTV is pushing the boundaries. The cleaner, newer or more maintained the property, the more comfortable the lender feels with higher leverages.
Let’s say your client is trying to get a loan on a duplex that’s got mold in the basement, a leaky roof and a backyard full of weeds. You might want to hold off on sending that deal over or possibly volunteer that the funds to fix the place be held back in an escrow to assure the lender that the collateral will get brought up to an acceptable condition.
Pro tip for brokers: Include detailed information on the property’s condition. Add some before-and-after photos, if they’ve done any recent work. The more you can demonstrate that the property is in good shape, the more likely the lender will bite.
Location matters
Private money lenders may not be as fickle as Goldilocks, but they sure do have preferences when it comes to location. Properties in major metro areas? Yes, please. Suburban homes surrounded by similar properties? Even better. And if your client’s property is in coastal Southern California — anywhere from Santa Barbara to San Diego, for instance — go ahead and pop the champagne. The California coast may just be my preference. But every lender has them, so find out what they are.
Generally, if you’re sending in a loan request for a property in the middle of nowhere, you might hear crickets. Lenders feel safest in markets where real estate has steady demand and strong resale value. So, when your client’s property is in a hot location, play it up. Don’t just mention it — sing it from the rooftops.
Pro tip for brokers: Location matters. If the property is in a sought-after metro or suburban area, lead with the address in your loan request.
Track record
Here’s a magic formula that private money lenders like: Property + Long-term Tenants = Happy Lender. Why? Because if the property has reliable tenants who are paying rent, and that rent is enough to cover the cost of the private money loan, the lender knows how the payments can be made up front. This makes everyone breathe a little easier, especially you, since you want the deal to close.
Let’s break it down: Imagine you’re submitting a loan for an investment property where the rent covers the loan’s interest payments. The lender thinks, “Great! I don’t even have to worry about the borrower’s income; the property pays for itself.” That’s a strong selling point. Don’t leave it out.
Pro tip for brokers: When submitting a loan request, always mention if the property has tenants, how long the tenants have been there, how long the current leases are and whether the rent covers the interest payments. This could be the detail that makes your deal irresistible.
Credit scores
Now, the million-dollar question: “Does my client need good credit?” The short answer is no, but good credit doesn’t hurt. Private money lenders aren’t as obsessed with credit scores as conventional lenders. They’re more interested in the asset (the property) than your borrower’s FICO score. A borrower with good credit demonstrates a history of paying bills on time, and that’s never a bad thing.
But even if your client’s credit is less than stellar, don’t panic. Private lenders are usually still interested if the property is in good shape or if other compensating factors exist (we’ll get to that). Just know that poor credit adds a layer of risk the lender may consider if there are multiple layers of risk.
Pro tip for brokers: If your client’s credit is shaky, make sure you’ve got some strong compensating factors to balance the scales. And be sure to highlight any positive payment history, even if it’s not perfect. By the way, having a perfect payment history when all the payments were set aside in an interest reserve is not impressive, as the payments were pre-made.
Compensating factors
Let’s talk about what private lenders love more than perfect credit, and that’s compensating factors. These are the little (or big) things that can tip the scales in your client’s favor, even if some elements of the deal are less than ideal. Here are a few compensating factors that private money lenders can’t resist:
● Cash reserves: Does your client have six months, or more, cash reserves? Fantastic. The more cash reserves, the less likely the borrower is to default, and the more comfortable the lender feels.
● Income stream: If your borrower has a stable income stream, make sure to mention it. The loan may not require income qualifying, but it’s still nice to know how they can make the payment.
● Cross-collateralization: As mentioned earlier, offering up other properties as additional collateral is a massive plus.
● Exit strategy: This is huge. The exit strategy refers to how the borrower plans to pay off the loan. Maybe they’re flipping the property and will pay the lender back when they sell. Maybe they’re refinancing with a long-term lender. Whatever it is, the clearer and more imminent the exit strategy, the safer the deal feels to the lender. And remember, the faster the exit, the better the odds of approval.
● Real estate experience: Private lenders adore borrowers with a track record of real estate success. If your client has flipped a few properties, managed rentals, or has experience buying and selling, make sure to highlight this. The more real estate deals they’ve done in the last three years, or ever, the better.
● Pro tip for brokers: Compensating factors can save a deal. When sending in your loan request, don’t just focus on the property. Show off your client’s strengths. Cash reserves, income streams, and real estate experience can turn a “maybe” into a “yes.”
So, how does a private money lender decide whether to approve or deny a 12-month bridge loan? It all boils down to risk management. They want to feel secure that their money is safe, and they do this by looking at a mix of factors: LTV, property condition, location, tenant stability, credit history (or lack thereof), compensating factors, and — most importantly — the exit strategy.
As a mortgage broker, your job is to package all this information in a way that makes the lender see the potential in your client’s deal. The better you understand how private lenders think, the more likely you are to send them loan requests they’ll approve. And that, my friend, means more deals for you and more commissions in your pocket.
Final pro tip: When in doubt, ask the lender what they’re looking for. Every lender has their preferences and getting clear what those are upfront will save you both time and frustration. Brokers who know what to send get more attention than brokers who consistently send deals way off the mark.
