Hard money reserves?

Question

Do all hard money lenders require a reserve?  I've just started talking with a hard money lender and they want at least 20K in reserves before moving forward.  They claim it's standard.  My credit is good, my debt-to-income ratio is good, etc.  I am a newbie -- and have one rental that I financed through a conventional loan five years ago.

Valerie Pedigo · Answer

Reserves are very important for their exit strategy (and obviously hedge against risk.) Most likely, they want to make sure you can qualify for a conventional loan. If your credit is good and DTI is good, but you don't have enough money in the bank to get financing...they will have to hold the note longer than anticipated or foreclose.

Remember that reserves can be whole life insurance policies, 60% of your 401K vested balance, CDs, stocks, bonds, mutual funds (not just checking and savings.)

Good luck!

Remember that reserves can be whole life insurance policies, 60% of your 401K vested balance, CDs, stocks, bonds, mutual funds (not just checking and savings.)

Good luck!

Heather D. · Answer

Thanks for such great info... I really appreciate your insight and experience.  I'll make sure that ask a few more questions and see what else may work.  Thanks again.

Valerie Pedigo · Answer

Exactly...it just depends on why they are asking for reserves.  If they want to see you have all cash, then the retirement money won't do.  If they want to make sure you qualify for permanent financing - it counts.

The biggest thing is communcation.  If they look at your deal (are happy with the numbers,) but have a little hesitation, ask them what else you can do to show them you are a good candidate besides pulling your retirement.

Can you cross-collateralize your other rental?  If you have conventional financing on that, you probably have equity.  Ask them if they will use the equity in that property to strengthen your deal.

You can go to a banker and get prequalified for a refinance to show you can get end financing.

Just throwing out ideas here...

Jon Holdman · Answer

It may depend on the lender.

Fannie Mae guidelines for conventional loans now require certain amounts of cash reserves.   To meet those requirements you can use some fraction of the amounts in your qualified plans, such as 401k's and IRAs.

Hard money lenders are sometimes going to want to see available cash.  If you are doing a hard money loan and are borrowing 70% of ARV, and your purchase and rehab costs are also 70% of ARV, the HML knows you are going to need about 15% of ARV in your own cash to complete the deal.  They will typically want you to actually put some of the cash into the deal up front, at the purchase closing. So, for a deal like this, having the money in a 401K or IRA won't do.

Heather D. · Answer

Thanks for all the responses.   I'm considering the hard money route just to reduce the amount of cash out of pocket as opposed to conventional financing.  Is my thinking faulty here?

Additionally, I appreciate the reasons for the reserves -- it just makes good business sense for the lender. But Valerie... you said I could use up 60% of the vested amount of my 401K?  I have enough reserves if I do that... but the other lender I spoke to wanted me to pull it all out.  So that's what prompted my question.

Darryl Dahlen · Answer

Ah, good point. I didn't consider the fact this could be a rehab scenario.

Jon Holdman · Answer

But hard money lenders will use a different "value" than conventional lenders.  Where a conventional lender will use the purchase price as the value, and lend you, maybe, 80% of that, a hard money lender will use the ARV as the value, and lend you 70% of that.  If you have a good enough deal the HML will be lending you more cash than the conventional lender, even though the LTV is lower.

Darryl Dahlen · Answer

Valerie said it well so I won't try to re-write what she has already pointed out. 
What are you trying to do? If your credit is good, and the DTI works, why are you pursuing hard money? Hard money almost always uses lower LTV percentages than conventional financing so that can't be the reason. Are you looking for cash-out?

Valerie Pedigo · Answer

Hard money is a great tool to get into a property, especially when rehab is needed.

As Jon said, if you use conventional financing to purchase, the value will be the purchase price.

But, if you use hard money to purchase (get 70% of ARV -usually less) and then do a no seasoning rate/term refinance - we can lend 75% of the appraised value.

I do several with that same exact scenario each month.  HMLs want to know that you have reserves so you can do this.

Ted Harris · Answer

Yes, HML want reserves .... however, you may want to consider a private money lender who will consider loaning funds without reserves if your profit potential is such to warrant that kind of risk.

Hard money reserves?

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