Recently, I have received a ton of calls from potential borrowers looking for Hard Money or Private Money to rehab bank owned properties. I have noticed two types of callers.
One, the borrower that actually qualifies for bank financing and had been told by their agent or some other non-finance specialist they needed Hard Money or cash to do these projects. These people are almost always pleasantly surprised to find out we can get them bank mortgage and they do not need to pay high fees and interest a private lender would charge.
Two, the potential borrower that has no credit, no solid income and no money to put into the project. This conversation usually starts like this "The property I want to buy last sold for $285,000 and I can get it for $125,000. It only needs about $50,000 in rehab so if your lender gives me a $175,000 it is a great deal for the lender and me. I am willing to pay him 15-20% when I sell the property." Once I inform them that they will need at least 20% into the project and the value we look at in using hard money is the purchase price + the construction rehab costs = X and X is the new true value in this market when applying for finance. These potential borrowers usually end the call and I am sure call another finance person that will tell them what they want to hear in the hopes of getting a loan. Then move on to the listing agents to waste their time. I say Good Luck!
It is a common misconception that if a property is not eligible for Fannie Mae or Freddie Mac mortgage finance that cash or Hard Money is the only option. This is absolutely wrong. If a borrower can either put 20% and sometimes more into the project they may be able to get a Hard / Private mortgage or the borrower has an adequate down payment and income to support the debt it is very likely I can get this borrower a bank rehab / construction mortgage.
Another misconception is that Hard Money is strictly based on the as completed value of the property. This does play a huge part to qualifying for a hard money loan but the lender will not put all of the financial risk on their shoulders. Purchase / Rehab Hard Money requires "Skin" in the game. The borrower has to have some money in to make the lender feel the borrower is committed. This might mean a 20% to 30% down payment. The only time a borrower can finance 100% of a Hard Money transaction is in a refinance and there is proven equity in the property.
I hope this little rant helps some of the confused potential borrowers out there and if you have additional questions feel free to contact me.
Dax Dickson
612-578-9898
Learn more about commercial mortgage loan programs available in the Minneapolis & St Paul, MN Metro area that can help those looking to secure purchase rehab mortgage loans for properties that do not qualify for programs like private/hard money loans or the FHA 203K rehab mortgage loan.
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