Welcome new real estate investors!
What´s the first question you ask after you locate a piece of property (or, maybe even ask prior to locating the property)? Naturally it´s: How am I going to pay for this?? Of course, that opens up an entire myriad of possible questions/solutions, among them:
1. What will my local bankers lend me?
2. What´s the best loan I can get by shopping local mortgage brokers?
3. What kind of money sources can I find by surfing the Internet?
4. Can I assume the existing mortgage on the property?
5. Will the seller finance my purchase?
These are all viable options. Unfortunately, they rarely come through for you because:
1. In order to secure your deal, you need to close in too much of a hurry for the first 3 options above to work, not to mention refusals due, possibly, to poor property condition.
2. If your credit is less than stellar, you may be refused credit altogether trying options 1-3.
3. If you are trying to buy via assignment of contract, or, if you want to purchase through your corporation, LLC, or a trust, most institutional sources won´t close you!
4. Trying nos. 4 & 5 above are certainly possible sometimes,3; with private sellers maybe, but not very often and banks seller3;never! However, if you can somehow arrange either of these options at sensible numbers go for it!
More often than not, the only or best way to beat out your competition and get your deal is to make an "all cash, as-is" offer, and on a quick-close basis. So, it then comes down to purchasing with either your own cash or using a hard equity loan.
In its purest form, a hard equity loan is a loan based solely on the equity in the property, and that´s the end of it. However, few hard equity loans are made in this pure form. Most of them have some additional considerations, such as property condition, creditworthiness of the borrower, the borrower´s cash exposure in the transaction, and geographical location and type of property.
The following is a Q & A that might typically transpire between a "newbie" real estate investor and our mortgage originators that will hopefully answer most of your questions as to how the process of obtaining a hard equity loan works as well as the cost and mechanics of funding the loan.
Borrower: What do I need to begin the process of finding out whether and how much you will lend me?
Lender: In the way of an overview, there are four main criteria we use in evaluating the quality of a loan, namely, the equity in the deal, the borrower's credit, the borrower's cash exposure, and the borrower's track record with us. Every deal is unique, and all four criteria are weighed against each other. First, we check your credit, or request a recent credit report from you. We do this on the first loan only. That's it - for life! We prefer a tri-merge credit report with minimum scores in the high 600's. But we will make a loan to anyone with nearly any credit. The better the credit, the higher the loan to value will be. Once we've made a few loans to you, your track record with us will play more importantly into the LTV than your originally-evaluated credit scores. But,3; getting back to our first loan, if your credit is really less than favorable, perhaps you can get a co-signer with better credit to go in with you, or at least co-guarantee the obligation, until your credit can stand on its own. We certainly will want to evaluate everyone's credit reports who are involved. We also have other available loan/investment options which will work for credit-challenged applicants. Please ask us about these!
Borrower: Generally, how much of my purchase price will you lend me, or will you base the loan entirely on the after-repaired value?
Lender: We "generally" lend 70-90% of the purchase price, not to exceed 50-65% of after-repaired value, or at least on the first deal or two with a borrower, assuming acceptable credit. The better the credit, the closer to the maximum LTV we will go. The more "challenged" the credit score, the lower the LTV, meaning more cash to close will be required from the borrower. As your track record seasons with us, our lending parameters slowly liberalize. We do not "roll" any of the closing costs into the loan, at least not for the first few deals. These must be borrower-paid at closing. LTV´s on vacant land are covered in the section below on construction lending.
Borrower: I'm paying only $40,000, and the home is worth $100,000 repaired. Will you lend me 65% of the $100,000?
Lender: No. The maximum loan would be the lesser of 70-90% of purchase price or 50-65% of the after-repaired value. Unlike some seminar gurus who would have you believe that there are "zero-cash-down" deals around every corner, in the real world, most hard equity lenders insist that borrowers invest some of their own cash in the deal.
Borrower: And your rates, points, and prepayment penalties?
Lender: 12-16%, and 2-4 points in most geographical areas. We acknowledge that this is a wide range. The rate and points will depend on the location of the property, loan-to-value requested, your credit score, and track record with us. Also, rate and point limitations vary state to state because of different licensing and rate ceiling statutes. We may be willing to defer collection of the points until you payoff the loan as well, possibly as a trade-off for a higher rate. Most of our loans do not carry a prepayment penalty feature, if the payment terms are followed. We also have, on an "as available" basis, hard equity funds at lower rates, even loans at bank rates, especially for loans on property we own and offer seller financing.
Borrower: Do you lend on all types of real estate? Single family homes, 2-4 unit residential properties, apartment buildings, vacant land, commercial buildings like warehouses, office buildings, etc. Hurricane, tornado, and fire-damaged properties?
Lender: Yes we do. However, remember that the market for the property, in part, determines the risk, which, in turn, is the major determinant of the loan-to-value. In other words, there is a broader market for the resale of a single family home than, say, an auto body shop building for example, or vacant land. Mortgages on the latter two would, therefore, generally be made at higher rates than a single family home. A similar rate analysis would be made on a severely distressed condition property. And, by the way, we are happy to lend on rental income properties that are greater than 4 units and/or otherwise "non-conforming" buildings.
Borrower: How large or small of a loan will you do?
Lender: We have no exact pre-set guidelines. But there are certain economies of scale when it comes to the size of a loan. For example, it costs about $400 at a minimum to write a title insurance policy, and $200-$400 in settlement fees. This would be the case whether the loan was $10,000 or $40,000. Similarly, mortgage document preparation will cost the same regardless of the loan size, for example. Thus, for a small $10,000 loan, these costs alone may run 7% - 10% of the mortgage principal. And closing costs are not just limited to these two items! The same fees for these services would apply to a $40,000 loan, but only amount to 1½% - 2% of the mortgage principal. Suffice to say, that while any size loan is theoretically fundable, economies of scale don't favor too small of a loan. As for the large loans, the approximate limit for new borrowers would be about $300,000. Our maximum loan per single deal, once a track record is well established is approximately $2,000,000. For deals larger than that, we are certainly interested, but may invite other hard equity lender participation to spread the risk. Any loans in the "jumbo" category, that is, $250,000 and up, would require credit scores at the top of our parameters.
Borrower: How long is the loan for?
Lender: Typically, two years, interest only, then automatically converting to an amortized loan, usually 15 year term, but sometimes as long as 30 years. Thus, there is no short-term "balloon" deadline hanging over your head.
Borrower: How do you appraise the property?
Lender: If the property is located in our local Southeast Florida tri-county area, we just go out and evaluate it ourselves. For mortgages outside of our immediate geographical area, we have a network of Realtors nationwide who, for a nominal fee, give us an accurate BPO (Broker's Price Opinion) with comparables and photos. We ask the Realtor to evaluate the property "as is", and also, if applicable, on an after-repaired basis.
Borrower: Any advance or application fees?
Lender: For mortgages in our local area, generally not. Outside of our area however, we usually request approximately a $150 advance fee for purposes of paying a Realtor in our nationwide network to evaluate your property. This benefits our borrower by being only half the price of a formal appraisal. If the Realtor´s evaluation is materially equivalent to your initial representation, we are able to proceed with the loan. If the Realtor´s opinion differs from your representation, we may have to reach a new agreement with you as to a different LTV. If we cannot reach a new agreement and/or you withdraw your loan application after the BPO is performed, the advance fee may be forfeited.
Borrower: The bank already has a first mortgage on my property, but there's still equity left. Can you lend me some additional funds against this equity?
Lender: That would be a second mortgage. Generally, unless the first mortgage ahead of us is less than 20% of the value of the home, we won't make a second mortgage loan. However, we will do refinances. However, in doing so, we would have to be the first lien holder, thereby utilizing our loan proceeds to pay off the existing first mortgage, and still stay at or below about 50-65% of full retail value.
Borrower: Once we agree on an LTV, rate and points, what´s next?
Lender: We will fax you a good faith estimate of closing costs and a lender disclosure sheet, and instruct our attorney to open a file and contact the closing agent you have selected to coordinate getting our mortgage documents to them in time for closing. If no closing agent has been selected, we will select an EquityMax-approved closing agent.
Borrower: How fast can you close?
Lender: Once we have inspected the property, or, alternatively, are in receipt of the Realtor's BPO (which we should get within a few days of your initial loan request), we can close in just 48 hours from receipt by our attorney of a clear title commitment, proof of adequate hazard insurance, and instructions where to wire the funds to the closing agent.
Borrower: What else is required of me in anticipation of closing?
Lender: 1) You must obtain insurance prior to closing, a one-year policy, and proof that you have paid for at least 6 months in advance. The proof of insurance must contain the insurance agent´s name, phone and fax. By "proof", we mean the declarations page, not just the application. Insurance coverage, naming EquityMax as the first loss payee, is a continuous obligation of the mortgage. We are happy to work with your insurance agent to ensure that the proof of coverage is adequate and is prepared in the appropriate format. EquityMax can recommend several good insurers in Florida who also cover real estate investor-owned properties nationwide! 2) Make sure that all who need to sign the loan documents will be available on the day of closing. This may apply to spouses, key officers and shareholders of corporations, trustees and beneficiaries, etc. Remember, either lack of insurance and/or the absence of a key signatory may halt a closing! 3) Make sure, pro-actively, you have had a chance to review the closing statement prior to closing, which EquityMax will procure for you. It´s important that you understand what it contains so you are not surprised at closing. It will also indicate how much cash, if applicable, you will need to bring to closing to complete the transaction.
Borrower: What can I expect at closing?
Lender: If you have followed the steps in the previous answer, you can probably expect a swift and efficient closing. You will be receiving title insurance coverage as part of your closing. You and any other guarantors will execute the documents in the closing and/or mortgage package, and depart the closing as the new owner of a parcel of real estate! Make sure you ask the closing agent for a copy of the complete set of closing documents. About 4-6 weeks later the closing agent will send you the original recorded deed to the property and your title insurance policy. Keep all of these documents in a safe and organized place.
Borrower: OK, I think I'm clear on everything. I want the loan. I'm ready to go. How do I apply?
Lender: Either call, email, or fax us, or return to our Home page and select the Apply for a Mortgage Loan sub-menu tab, under the Get Started Menu, and advise us the address of the subject property, property folio or ID no. if available, and the purchase price. We will usually be able to quote you a proposed loan amount over the phone or via a very prompt return email, subject to the additional conditions mentioned previously. If you are contacting us from or concerning a property outside of the South Florida area, please send, or inquire if we require you to send, $150 for a Realtor BPO. If this is your first loan application with us, then please provide us a copy of your tri-merge credit report as well, or ask us to run the report within the above Apply for a Mortgage Loan submission form. Note: Please be advised that if you are requesting a loan outside of Florida, allow approximately an additional 10 day lead time.
Borrower: How do your lending criteria differ for construction loans?
Lender: The four main criteria above are similarly considered, and, additionally, our evaluation of how new construction will sell at your projected price in that area.
Borrower: What are your LTV parameters?
Lender: On vacant land, with no construction, we will lend 20-40% of purchase price depending largely on geographical area and zoning. After all, raw land does not need new paint or a new roof. In other words, it is generally not in "distressed" condition. It usually just "is what it is"! However, we do recognize that sharp and methodical land buyers among us who specialize in distressed-price land acquisition often pick up parcels at significant discounts. If that can be accurately determined by a separate independent Realtor´s BPO, as explained in the above section, then materially higher LTV´s will apply. If the loan involves land and construction, the construction draws are structured at LTV´s such that by the time the construction is through, our loan will have been made at 60-75% of total cost of land and construction, not to exceed 50%-65% of the projected resale value of the new building. Just as with regular hard equity loans, the fact that you have some of your own funds invested is critical to the formula.
Borrower: How do you structure a loan like this?
Lender: We fund the applicable portion of the purchase price of the vacant land, and then fund a percentage of the construction in draws, and in arrears of the work on each draw being completed. We ask the borrower to have a G703 form, or the equivalent, prepared. You can view one of these forms on this Web site in the Construction Loans sub-menu of Our Services Menu. It is a well-recognized form used by architects and contractors. The draws are arranged pursuant to an agreed upon LTV and itemized on the G703. Here´s an example of how the draw schedule might look in a typical construction loan scenario, and consistent with the ratios as suggested in the previous paragraph.
Draw Value Borrower´s Portion Lender´s Portion (65% in total)
Draw Value Borrower’s Portion Lender’s Portion (65% in total)
Lot Purchase $ 30,000 $ 21,000 $ 9,000
Draw 1 $ 20,000 $ 5,000 $15,000
Draw 2 $ 20,000 $ 5,000 $15,000
Draw 3 $ 20,000 $ 5,000 $15,000
Draw 4 $ 20,000 $ 5,000 $15,000
Draw 5 $ 20,000 $ 5,000 $15,000
Total Cost $130,000 $46,000 $84,000
Remember, the lender´s portion is distributed in arrears.
Projected property resale value: $175-$180,000
Borrower: And your rates, points, fees, and term?
Lender: Generally, they are just a little higher than our normal rates. This applies to land-only mortgages and construction loans. On construction loans, the payments apply only to the amount actually drawn at the time the monthly payment is due. There are 3-4 origination points, sometime deferred to payoff. The mortgage term is negotiable, according to the builder´s requirements. In South Florida, we charge a $100-200 inspection fee for each constriction draw. These costs may be collected at the inception of the loan. They are charged to defer our costs of inspection and internal administration of each draw.
Borrower: Do you have any geographical limitations outside of South Florida?
Lender: Not specifically, other than the fact that inasmuch as construction lending by its very nature (a loan on an unfinished structure) is much riskier than a standard hard equity loan, our parameters would have to be determined on a case-by-case basis. In that regard, our LTV´s, rates, points, fees, etc, may vary depending on the particulars of any construction loan outside of South Florida.
Borrower: Are your construction loans applicable only to 1-4 unit residential properties?
Lender: No, we will lend for any viable building project. However, our most favorable LTV´s would indeed be for 1-4 unit residential properties.
Borrower: How large of a loan will you make?
Lender: We stay with smaller projects, not exceeding more than $300,000 per single project. This will no doubt increase in the future.
Borrower: What type of insurance do we need to carry?
Lender: Builder´s risk, with EquityMax named as first loss payee. We will need a copy of the declarations page, with proof of payment for one year in advance.
Borrower: How are the closing costs determined on a construction loan with draws?
Lender: All of the closing costs are paid for with the initial land purchase. All applicable documentary stamps, intangible tax (for Florida properties) and/or any other similar official fees and the title insurance premium are charged at closing on the entire amount of the loan. This eliminates the need for having time-consuming and costly closings for each additional draw. After the initial closing, all draws will be disbursed directly to you from us, the lender.
Good luck...and let´s hear from you soon!