Why would a borrower with a 736 FICO score get a hard money loan?
I'm deviating a bit from my earlier blog, So you want to be a California Hard Money Broker? I know I promised more detailed information about the disclosure process in California Hard Money transactions and I will. Tonight, I'm not up to that arduous task. I'll share with you some reasons why a borrower with GOOD credit would actually pay the high points and rates associated with a "hard money loan"
Introduction: Private mortgages or "hard money" loans are all about taking on risk that is unacceptable to conventional lenders. This loan is most commonly known for the "foreclosure bailout" but can be useful for an investor looking for a quick loan approval to take advantage of an extraordinary property.
Small Apartment houses: We often get requests from multi-family investors for a loan that allows a seller-carryback behind it. Multi-family loan underwriting is driven by the income derived from the property. The traditional multi-family lenders are anal about this ratio called "debt service coverage". Now we tend to understand that a property can go through a renaissance by some minor cosmetic improvements. We know that the improvements will result in higher rental income and subsequent higher values. We are willing to accept a subordinated seller-carryback for an investor who wants to purchase a property with negative cash flow provided he has a detailed plan on how to improve the property and restore the DSCR through higher rental income.
Vacant Land: Traditional vacant land lenders are wary of seller-carrybacks. We are willing to lend up to a certain value on vacant land with a seller-carryback up to 100%. Our rational is that the market risk has been transferred to the seller with this type of loan transaction. If we are comfortable owning that vacant land at the loan amount (usually 50% LTV), we'll make the loan.
Owner-Occupied Commercial: Traditional commercial lenders won't lend on an owner-occupied commercial building for fear of the business risk associated with the borrower. If we feel that the property has utility in other businesses, we'll throw a value on it and lend up to 65% of that value. Our thought-process is that a business that paid rent in a similar amount to our debt service will be able to handle the load. If we're incorrect, we have a property that is attractive to other businesses at a below market cost-basis.
Flippers or Foreclosure Buyers: We generally dislike flippers because they'll be wrong one day and we don't want to be the lender on that one wrong transaction. However, we have found some borrowers with a really good eye for "the deal. " Their experience in undervalued transactions is what gives them credibility with us. They appreciate our ability to make a quick loan decision and fund quickly. Sometimes, a low price can be negotiated by a buyer with the promise of a 7-day closing.
Broken Construction: Banks and traditional mortgage lenders HATE broken contsruction; we understand it. Traditional companies believe that an owner-builder who runs out of money can't manage a construction budget. We understand that the past two years have been difficult with higher materials' costs and labor costs. We'll look at the end result (market price of the finished project) , control the funds needed to finish the project (via the draw/inspection method of disbursing funds), and lend the money.
Just a few ideas for hard money brokers on how to find potential borrowers for your niche loan product.
Read: So You Want to Be a California Hard Money Broker?
Hard Money Equals Hard Headaches for an originator's learning experience
What is Hard Money Lending?
You're Building and You Ran Out of Money?
What's Your Rate?
I Guess I'm a Predatory Lender
Did You Receive a Notice of Default?
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Next to Mary McKnight, I probably learn more from your blogs than anyone else. Thank you, Brian, for taking the time to put great information like this into digestible formats!