One of the most common questions we get from borrowers is some version of: "How much money do I actually need in the bank to get approved?"
It's a fair question, and the honest answer is more nuanced than a single number. We've developed a clear framework for evaluating borrower liquidity, and right now in this lending environment, it's the factor we're watching more closely than almost anything else.
At minimum, a borrower needs to demonstrate they can cover four things simultaneously:
Down payment. This is the starting point. Whatever the loan-to-value structure requires, the borrower needs those funds verified and accessible at closing, not tied up in a pending transaction or projected from a future sale.
Closing costs. These get overlooked more often than you'd think. Title fees, origination costs, and other closing expenses add up quickly, and they need to come from the borrower's own funds.
Carrying costs for the duration of the loan. This means interest payments and insurance for the expected hold period. If a borrower is planning a 12-month renovation and exit, they need enough to service that debt for 12 months, not just at closing.
The borrower's share of renovation costs. Most private loans don't fund 100% of the rehab budget. Whatever portion the borrower is responsible for needs to be sitting in their account, not dependent on future draws or financing.
Covering those four categories is the bare minimum. Beyond that, we want to see an additional 5 to 15% in reserves on top of total project costs.
That buffer exists for a straightforward reason: we don't know everything going on in a borrower's financial life. They have a mortgage or rent, living expenses, other loans, and unexpected costs that come up during any renovation project. A borrower who has exactly enough to close the deal has no margin for anything to go wrong, and things go wrong on almost every project.
The buffer is what tells us a borrower can absorb a surprise without the loan going sideways.
We recently passed on a deal that illustrates why this framework matters.
The borrower had enough to cover the down payment but was counting on two upcoming transactions, a cash-out refinance on another property and a separate property sale, to provide the rest of their liquidity. Both were expected to close within one to three months. On paper, the math worked out.
We spoke directly with the refinancing lender and reviewed the purchase contract for the pending sale. After doing that diligence, we didn't have enough confidence that both transactions would close on the timeline the borrower needed. One delay, one issue with the buyer, one wrinkle in the refi underwriting, and the borrower ends up in a position they can't bridge.
We passed.
It wasn't a reflection on the borrower. We genuinely liked working with them. But projected liquidity from back-to-back transactions carries a different kind of risk than verified reserves, and we underwrite accordingly.
LTV matters. Deal quality matters. Exit strategy matters. But right now, borrower liquidity is the single variable we're monitoring most closely.
The current environment has pushed a lot of real estate investors into tighter positions. Rates are higher, timelines are longer, and projects that penciled easily a few years ago now require more capital to execute. Borrowers who came in with adequate reserves at the start of a deal can find themselves stretched by month six or seven.
We're not trying to make approvals harder for the sake of it. We're trying to make sure the loans we fund are set up to succeed, for the borrower and for us.
Verified bank statements showing funds to cover the down payment, closing costs, and carrying costs for the full loan term. Documentation of their share of the renovation budget. Reserves beyond that, ideally 10% or more, sitting in an accessible account. If a borrower is relying on a pending sale or refinance to fund part of their position, be prepared for a detailed conversation about those timelines and the strength of those transactions.
The cleaner the liquidity picture looks on day one, the faster and smoother the approval process goes.
Down payment plus closing costs plus carrying costs plus the borrower's portion of renovation, and then 5 to 15% on top of that. That's the starting point we use when evaluating whether a borrower is positioned to close and carry a deal successfully.
Borrowers who understand this framework before they apply tend to move through underwriting faster and with far fewer surprises on either side of the table.