Mortgage originations in the private channel have grown this year because of B-20, but with the increase in volume has come a slew of common mistakes.
According to Laura Martin chief operations officer of Matrix Global Mortgage, and co-founder of Private Lending Hub, some brokers are prone to making the same few errors. Brokers often treat the private channel as an afterthought and, therefore, don’t prepare airtight files. Martin says every legitimate private lender expects clear purpose for funds and an exit strategy.
“There needs to be a clear strategy for how the loan will be paid out at the end of the term since the investor will want to reinvest their funds again,” she said. “Common exit strategies are to sell in a year after doing upgrades, or to explain how their credit and/or income situation will improve enough to qualify for a refinance with a B or A lender at the end of the term. Be realistic and have a good understanding of what your client needs the funds for, and what they will be doing during the term to make sure they are in a better position for financing at the end.”
The reason private lenders usually don’t break 80% loan-to-value ratios is because of how difficult finding a new lender to refinance such a high LTV is—especially given the new normal of tightened lending guidelines.
While it should go without saying, even private lenders expect proper documentation. Because private space investors lend based on asset quality, full appraisals from either the CRA or AACI are necessary, but Martin recommends waiting until a willing lender has been found because they usually have their own trusted appraisers.
“Although the lender will put more weight on the asset in question, they still have questions and documentation requirements to prove that the borrower has an ability to pay,” she said. “This could mean that they will still require records of personal net worth, business or personal bank accounts, tax statements, and other relevant items such as separation or divorce agreements, spousal consent, mortgage statements, and disclosure of all properties owned.
“Get as many of these documents upfront to avoid back-and-forth. If your client makes mostly cash, or if there’s a large disparity between the amount of income they claim to make versus how much they show, you will need to find ways to prove and explain how they will be making their monthly payments on time and how they will position themselves to have acceptable TDS and GDS ratios at the end of the term.”
Don’t shop the deal to death. Just as A and B lenders don’t appreciate it, neither do private lenders. However, private lenders often cut off brokers who fail to secure signed borrower commitments.
“The more lenders who see a deal and decline it, possibly due to the way it was presented and not because it was un-fundable, the fewer options there ultimately are, so co-brokering to an experience private mortgage underwriting service such as Private Lending Hub can be more efficient if you’re less experienced,” said Martin. “Also don’t forget to gain thorough understanding of the investor’s geographic limitations and criteria, asset class types, minimum and maximum loan amounts, their comfort level with past bankruptcies and missed payments.”
Private lender Wasah Malik of King Lending Capital is surprised at how many times brokers fail to disclose that their clients have second mortgages.
“Sometimes borrowers do not make their brokers aware of a second mortgage on a property, so the broker won’t put that on the application,” he said. “What brokers sometimes don’t do correctly is they don’t explain the deal properly; they don’t even know the backstory for what the deal is supposed to be. It’s always important to understand your borrower’s situation to build comfort in that deal.”