Whether positive or negative, it’s safe to say that COVID-19 has had an effect on nearly every industry. The hard money lending industry is no exception and has likewise been affected by the pandemic. Specifically, New Jersey Hard Money Lenders have changed their lending habits and underwriting criteria.
After COVID first hit in March and April, many hard money lenders in New Jersey cut back lending significantly, and in many cases stopped disbursing loans all together. While here at West Forest Capital we were still lending, calling our contacts around the industry to compare notes, it was hard to find another lending that was not at least on pause. (Our structure as a partnership allows us to lend when others cannot, but that’s a topic for a different post).
In the months that followed, from May onwards, many lenders did slowly come back but the underwriting criteria changed, becoming tighter. While pre-COVID lenders would provide very experienced borrowers 90% of the purchase price, and perhaps 80% to less experienced borrowers, as of November 2020, those figured are about 5-10% lower; lenders are providing 80%-85% of purchase price to top tier clients and 70%-75% to other clients. What COVID has not changed, however, is the funding of rehab funds — hard money lenders are still providing from 90% to 100% of the rehab budget. The logic for this makes sense: while a lender takes on the initial risk by lending on the purchase price, the rehab is meant to add value. In other words, just like real estate investors, lenders want rehab to be done because it improves the value of the property and are therefore willing to lend on the rehab dollar for dollar.
COVID did bring a silver lining, however, in that New Jersey hard money lenders are more willing to lend further out in the state. This is mostly due to the suburbs and even some rural areas experiencing a significant uptick in demand. For example, lenders that had previously concentrated on Northern New Jersey are now lending as far away as Princeton, New Egypt, or even further out west in Warren Country.
While advance rates have changed, the interest rates charged by New Jersey hard money lenders have remained similar, at least on residential properties and standard projects like fix-and-flips. On these types of properties, interest rates of 10%-11% with 2% upfront are still common (read further down for rates on other types of collateral). Some lenders have increased requirements for interest reserves – ranging from 3 to 6 months – to be funded at closing.
Post COVID, many hard money lenders in New Jersey have also required a higher minimum credit score. While pre-COVID FICO scores down to 620 were often acceptable, now 650 has become a common cut-off point (it’s worthwhile to note that West Forest Capital does not have a minimum FICO). Local hard money lenders are also increasingly looking at the underlying borrower profile and not just the property. Documents such as tax returns and bank statements have become more frequently requested and carefully reviewed; evidence of current employment is beneficial.
Finally, COVID has also affected the type of real estate that New Jersey hard money lenders are comfortable lending on. Pre-COVID, many lenders would lend on all types of properties – residential, commercial, industrial, mixed-use, sometimes even raw land. Post-COVID, however, some lenders have scaled back and are only lending on residential properties. If still lending in the commercial or industrial space, lenders have cut back advance rates to 60-70%, and are requiring a premium in terms of rate and points; 12% ongoing and 2% upfront are common figures for illiquid commercial or industrial properties.
Where we can help
West Forest Capital does not have restrictions on the types of properties we can lend on. In fact, we specialize in unusual properties that are harder to value, or those that cannot be funded by other hard money lenders. Even on these types of properties, however, our rates remain reasonable and our service second to none! Don’t just take our word for it, call us (212-537-5833) with your deal scenario and see how we can help right away.