14 Expert Tips to Get Loans Approved (Conventional OR Private Money!)

by | BiggerPockets.com

As a real estate investor, one of the worst things that can happen is searching for months to find the perfect property for your next project only to get turned down when it comes time to get financing. How do you avoid this most unpleasant experience? Here are 14 tips for getting approved by a lender, whether you are going the conventional route or with private money lenders.

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Conventional Lenders

1. Include income history.

You’ll need to provide a clear and comprehensive documentation of steady income. Note: Conventional lenders really prefer to see W2 income.

2. Be ready to present your credit score.

Hopefully your number is in the excellent range. If not, you still need to show your number and make sure you have a clear and concise explanation as to why your score is not excellent.

3. Offer comprehensive and current financial reports.

This includes personal and any partners’ financials, company financials, a business plan for your project including detailed financials, and pictures.

4. Present your track record/experience.

Make it easy for the lender to verify your track record. Include summaries of prior deals, and if possible, copies of closing statements from those deals so that lender can verify your numbers.

5. Provide additional collateral.

Do you have a rental property that a lender can take a second lien on as additional collateral? This can help in situations where there are issues elsewhere in your profile.

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6. Start small.

Less expensive properties are easier than expensive properties to get approval for if you’re a first-time borrower.

7. Know your market.

Where is there the greatest demand for improved properties? At what price point? In Minnesota, for instance, we’re seeing huge shortages of homes under $350k. Above-$500k shortages are less severe, and as such, we’re more likely to lend to a first-time borrower in the under-$350k price bracket.

8. Build a relationship with potential lenders before you need a loan.

Yes, it is about the numbers but at the end of the day, people do business with those they like and trust. Get to know your potential lenders before you need the dough.

9. Apply to multiple financial institutions.

It is more work and time-consuming, but applying to more than one lender can be a good strategy. This can end up saving you time in the long-run if your first choice turns you down.

10. Match the property with the lender.

Certain lenders will prefer certain types of properties. When you are building your relationship with potential lenders, make sure you learn which types of deals they are most likely to lend on.

Related: Why You Shouldn’t Worry About How Many Loans You Have in Real Estate

Private Money Lenders

Private money loans, also known as rehab loans, bridge loans, or hard money loans are a type of financing provided to real estate investors (borrowers) by private lenders for the purchase or construction of properties. The borrower’s objective is usually to purchase and then fix and flip—or, in the case of new construction, build the property and sell. In both cases, time is critical. Borrowers want to complete the project as quickly as possible, so they can repay the loan and turn their project into profit.

There are many varieties when it comes to private money loans, but most have the following characteristics:

  • Usually short-term (6 to 12 months)
  • Most often fund fix and flip projects, but can also be used to build new properties or purchase and hold
  • Most commonly used to purchase residential properties, but can be used for commercial real estate

What problems does a private money loan solve for borrowers? Traditional loans are generally cheaper than private money loans but more difficult to obtain. Real estate investors (borrowers) turn to private money loans to overcome several challenges:

  • Timing constraints and lost opportunity: Traditional bank loans usually take 30+ days to complete. For most real estate investors, this means lost opportunity. Waiting 30 days for your money usually means a competitor with the cash will swoop in and “steal” your deal.
  • Income evaluation: Proof of income is a requirement for traditional lenders. For many real estate investors who are often self-employed or commission based, this requirement disqualifies them for bank loans.
  • Project value vs. property value: A common measurement tool for banks is loan-to-value ratio. Since investors need to consider both purchase price and improvement price, the bank requirement can be difficult to meet. Private money lenders focus on the property value since the loan is secured by the property. This simplifies the requirement.
  • Condition of the property: Many traditional lenders (FHA) require the property to be in move-in ready condition. Since the nature of most real estate investor projects is fix and flip, this requirement is difficult to meet. Hard money lenders understand the nature of the project and that move-in ready will be the result after improvements are made.
  • Credit score: A strong credit score is required by all conventional institutes for any loan consideration. Private money lenders look at credit score as one of many factors but are most interested in the property value.

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Related: 7 Simple Steps to Get Approved for a Conventional Real Estate Loan

If you are going for private money financing, you’ll still want to have as many of the items listed under conventional as possible. However, private money lenders will pay less attention to factors like credit score and W2 income and more on property value. But showing W2 income and a great credit score can only help. Here are a few additional tips above and beyond the conventional lender list that you’ll want to have when pursuing private money.

11. Present the potential value of the property you want to purchase.

Present a clear financial plan for your project. A great tool to have is a spreadsheet showing all expenses, projected sale price, and profit. You’ll want to show potential lenders that you have thought through the details of the project and have realistic projections.

12. Ensure your financial information is well-organized.

Regardless of what you include—W-2s, pay stubs, bank statements, and other items in your credit history—make sure it is well-organized and up-to-date. Make it easy for the potential lender to find the information they are looking for. Help them gain confidence in you as a borrower by being thorough, detailed, and well-organized.

13. Provide a track record of paying and completing projects on time and in budget.

This is a great way to assure the lender that you are a good risk. Of course, if you are just starting out, you’ll need to employ some of the other tools on this list to build confidence and trust among your potential lenders.

14. Build a network of real estate professionals who will vouch for you.

This is one of the tools you can use to help build confidence with lenders when you don’t have the track record. The real estate investor market is usually small and word gets around. Make sure you have a stellar reputation among your peers. Then leverage your network.

What tips would you add to this list?

Comment below!

About Author

M. Ian Colville

Ian Colville is the Managing Partner of CCM Finance. Ian is a native of Minnesota (born in Rochester). He brings both a formal education (BA in Economics and MBA) as well as industry experience to CCM Finance. Ian is passionate about the many opportunities that real estate investments offer for both short-term and long-term financial gains. He is committed to helping local real estate investors turn those opportunities into profits. When not doing real estate deals Ian enjoys – well mostly he enjoys working on real estate deals. But if he does break away he is likely spending time with family or at the gym. Find out more about CCM-Finance and Ian here.

5 Comments

  1. Nicole Heasley

    Hi Ian,

    Your timing couldn’t be better; I’m in the process of applying for my first commercial loan. I just submitted my application yesterday, and it got me thinking of ways I can be better prepared for my next application.

    They asked MANY questions about my income, assets, liabilities/debt, blood type, planned names for my first-born, etc. What I would like to do is find some kind of tool I can use to input that information and generate clean, user-friendly reports. I already have BP to generate financial analyses of properties. I use Mint to track my spending, but I think I’m going to need something more sophisticated as my REI business expands. I don’t think Mint is the right tool for the job. Any suggestions?

    I plan to use the weekend to get myself organized for future loan applications. You’ve provided the perfect blueprint to get me started. Many thanks!

    • M. Ian Colville

      Hi Nicole. I don’t think you need to get too fancy on the personal financial info side actually. We own $50mn worth of properties and I still use a (relatively) simple Excel-based personal financial statement to communicate my personal info to banks. Do a google search for “personal financial statement template filetype:xls” and you’ll find a lot of different Excel templates to chose from. I update my PFS about once per quarter and I keep it in a folder on my computer along with PDFs of all of my tax returns and K1 statements. This alone covers about 75% of what a bank usually asks for. On the business side, you may want to invest in some technology (like Quickbooks) that will allow you to do some more real-time reporting but I haven’t found this to be necessary on the personal side. I would be interested to hear if you come up with something that you like however!

  2. Chad Janda

    Couldn’t agree more with number 8! It is always a good idea to build a relationship with a lender even before you have a property in your sights. This way you understand their requirements and can tailor your search criteria to fit their loan programs.

  3. Brandon Feldman

    Ian,

    I enjoyed reading your article and greatly appreciate your advice in this area. I am just beginning my journey into REI and the topic of conventional loans vs creative financing has been a big one on my mind for a while now. Considering that I am just starting out I think the route of conventional loans would be best for me to acquire my first few properties, and then use that knowledge and experience to expand further into creative financing.

    Going along with your tips for conventional loans, I couldn’t agree more with your comments about getting to know your lender and to apply to multiple lenders. However, between your two comments of know your market and start small, what would you say is a good middle ground between the two? I would prefer to start small but the better quality homes and neighborhoods in my market range between $200-350K, which I would prefer over the older neighborhoods that have less of a chance for appreciation. Your thoughts would be much appreciated, thanks!

  4. M. Ian Colville

    This is a great question! I don’t know your market so I can’t give you an exact opinion on where to strike the balance but I understand your concern. Without knowing your market, I would say that you should aim for a price point that is low enough to be affordable for first-time home buyers but try to stay away from the neighborhoods that you think are undesirable. What is affordable will depend on income levels in your market. Is that possible in your market? If so, then great. Now that I’ve said that, I should mention that here in MN the market for starter homes is SO tight that just about the only place you can find a home for under $200k is in neighborhoods that were traditionally considered undesirable. This means that prices are moving up fast in these neighborhoods and they are transitioning (at the margins) in to more acceptable places to live. We’re just at the beginning of this process however so choosing exactly where to buy is still a bit of an art. Getting it right however can often mean bigger profits (in percentage terms) than in more desirable neighborhoods.

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