Archive for

Alternative Loan Options for Residential Real Estate Investment

Conventional loans are typically the hardest to obtain for real estate investors. Some lenders don’t allow income from investment properties to be counted toward total income, which can make global underwriting a problem for certain investors, especially those who already have several existing conventional, conforming real estate loans reporting on their credit. In these cases, the investor must look outside conventional funding for their investments. Two of the more popular choices for alternative financing are portfolio loans and hard money loans.

Portfolio Loans

These loans are loans made by banks which do not sell the mortgage to other investors or mortgage companies. Portfolio loans are made with the intention of keeping them on the books until the loan is paid off or comes to term. Banks which make these kinds of loans are called portfolio lenders, and are usually smaller, more community focused operations.

Advantages of Portfolio Loans

Because these banks do not deal in volume or answer to huge boards like commercial banks, portfolio lenders can do loans that commercial banks wouldn’t touch, like the following:

smaller multifamily properties
properties in dis-repair
properties with an unrealized after-completed value
pre-stabilized commercial buildings
single tenant operations
special use buildings like churches, self-storage, or manufacturing spaces
construction and rehab projects
Another advantage of portfolio lenders is that they get involved with their community. Portfolio lenders like to lend on property they can go out and visit. They rarely lend outside of their region. This too gives the portfolio lender the ability to push guidelines when the numbers of a deal may not be stellar, but the lender can make a visit to the property and clearly see the value in the transaction. Rarely, if ever, will a banker at a commercial bank ever visit your property, or see more of it than what she can gather from the appraisal report.

Disadvantages of Portfolio Loans

There are only three downsides to portfolio loans, and in my opinion, they are worth the trade off to receive the services mentioned above:

shorter loan terms
higher interest rates
conventional underwriting
A portfolio loan typically has a shorter loan term than conventional, conforming loans. The loan will feature a standard 30 year amortization, but will have a balloon payment in 10 years or less, at which time you’ll need to payoff the loan in cash or refinance it.

Portfolio loans usually carry a slightly higher than market interest rate as well, usually around one half to one full percentage point higher than what you’d see from your large mortgage banker or retail commercial chain.

While portfolio lenders will sometimes go outside of guidelines for a great property, chances are you’ll have to qualify using conventional guidelines. That means acceptable income ratios, global underwriting, high debt service coverage ratios, better than average credit, and a good personal financial statement. Failing to meet any one of those criteria will knock your loan out of consideration with most conventional lenders. Two or more will likely knock you out of running for a portfolio loan.

If you find yourself in a situation where your qualifying criteria are suffering and can’t be approved for a conventional loan or a portfolio loan you’ll likely need to visit a local hard money lender.

Hard Money and Private Money Loans

Hard money loans are asset based loans, which means they are underwritten by considering primarily the value of the asset being pledged as collateral for the loan.

Advantages of Hard Money Loans

Rarely do hard money lenders consider credit score a factor in underwriting. If these lenders do run your credit report it’s most likely to make sure the borrower is not currently in bankruptcy, and doesn’t have open judgments or foreclosures. Most times, those things may not even knock a hard money loan out of underwriting, but they may force the lender to take a closer look at the documents.

If you are purchasing property at a steep discount you may be able to finance 100% of your cost using hard money. For example, if you are purchasing a $100,000 property owned by the bank for only $45,000 you could potentially obtain that entire amount from a hard money lender making a loan at a 50% loan-to-value ratio (LTV). That is something both conventional and portfolio lenders cannot do.

While private lenders do check the income producing ability of the property, they are more concerned with the as-is value of the property, defined as the value of the subject property as the property exists at the time of loan origination. Vacant properties with no rental income are rarely approved by conventional lenders but are favorite targets for private lenders.

The speed at which a hard money loan transaction can be completed is perhaps its most attractive quality. Speed of the loan is a huge advantage for many real estate investors, especially those buying property at auction, or as short sales or bank foreclosures which have short contract fuses.Hard money loans can close in as few as 24 hours. Most take between two weeks and 30 days, and even the longer hard money time lines are still less than most conventional underwriting periods.

Disadvantages of Hard Money and Private Money Loans

Typically, a private lender will make a loan of between 50 to 70 percent of the as-is value. Some private lenders use a more conservative as-is value called the “quick sale” value or the “30 day” value, both of which could be considerably less than a standard appraised value. Using a quick sale value is a way for the private lender to make a more conservative loan, or to protect their investment with a lower effective LTV ratio. For instance, you might be in contract on a property comparable to other single family homes that sold recently for $150,000 with an average marketing time of three to four months. Some hard money lenders m lend you 50% of that purchase price, citing it as value, and giving you $75,000 toward the purchase. Other private lenders may do a BPO and ask for a quick sale value with a marketing exposure time of only 30 days. That value might be as low as $80,000 to facilitate a quick sale to an all-cash buyer. Those lenders would therefore make a loan of only $40,000 (50% of $80,000 quick sale value) for an effective LTV of only 26%. This is most often a point of contention on deals that fall out in underwriting with hard money lenders. Since a hard money loan is being made at a much lower percentage of value, there is little room for error in estimating your property’s real worth.

The other obvious disadvantage to a hard money loans is the cost. Hard money loans will almost always carry a much higher than market interest rate, origination fees, equity fees, exit fees, and sometimes even higher attorney, insurance, and title fees. While some hard money lenders allow you to finance these fees and include them in the overall loan cost, it still means you net less when the loan closes.

Weighing the Good and the Bad

As with any loan you have to weigh the good and the bad, including loan terms, interest rate, points, fees, and access to customer support. There is always a trade-off present in alternative lending. If you exhibit poor credit and have no money for down payment you can be sure the lender will charge higher interest rates and reduce terms to make up for the added risk.

Government’s PLUS Program Offers More Than Parent Loans

Although most undergraduate students must provide their parents’ financial information when applying for federal financial aid for college, not all parents may want or be able to help their children pay for college. Colleges and universities, however, typically do expect parents to make some financial contribution to their dependent children’s college costs.

When applying for college aid, dependent students – those students who are claimed on someone else’s tax return – may be eligible, depending on their and their parents’ income, for federal grants and student aid, state-funded grants and school loans, and a school’s institutional student aid.

Graduate students and non-dependent undergraduates may also apply for federal, state, and institutional financial aid.

PLUS Parent Loans

In many cases, a financial aid package may not be enough to cover what your school expects you and your family to pay for college, even when combined with any scholarships and savings you’re bringing to the table.

If you’re an undergraduate and a dependent of your parents, and if your parents are willing to help you pay for college, they may be able to take out a federal parent loan – known as a PLUS loan – that can be used to pay for the cost of attending college.

PLUS parent loans are available in loan amounts that cover up to 100 percent of your certified cost of attendance.

PLUS Graduate Student Loans

PLUS loans, however, are no longer just for parents and their dependent undergraduates.

Beginning in 2006, the federal government opened up the PLUS program to graduate students as well. PLUS graduate student loans, known as Grad PLUS loans, can be used, like PLUS parent loans, to pay up to 100 percent of your certified cost of attendance.

Under federal rules, graduate students are automatically regarded as non-dependents and are thus ineligible for PLUS parent loans, which are only available to parents of undergraduates.

Grad PLUS loans offer graduate students an additional college financing option to scholarships, grants, fellowships, and federal Stafford graduate student aid.

PLUS Loan Eligibility

Eligibility for PLUS parent loans and graduate loans is determined, in part, by the information you submit on the FAFSA, the Free Application for Federal Student Aid. All students, both graduate and undergraduate, who are looking for federal financial aid for school must complete a FAFSA each year.

PLUS and Grad PLUS loans, unlike federal Perkins college loans and federal Stafford student loans, are credit-based loans that require a modest credit check.

In order to meet PLUS credit requirements, parent and graduate student applicants must be free of serious adverse credit items, such as a recent foreclosure or bankruptcy, significant delinquencies (defined as 90 days or more) on credit accounts, or a default on another federal parent or student loan.

Undergraduate students whose parents fail to qualify for a PLUS loan are eligible to receive additional money in federal student aid to help meet their expected family contribution to their college costs.

PLUS Loan Interest Rates

Loans made through the federal PLUS program allow you to borrow money for college at a fixed interest rate.

PLUS loans, both for parents and graduate students, currently carry a fixed interest rate of 7.9 percent. For graduate students looking at their graduate loan options, this rate is slightly higher than the fixed 6.8-percent rate available on federal Stafford graduate student aid.

PLUS and Grad PLUS loans are also subject to a 4-percent servicing fee, which is deducted from the loan proceeds at the time the loan is issued.

Repaying Your PLUS Loan

Until 2008, repayment on PLUS parent loans would begin 60 days after the loan funds were disbursed. However, under new legislation passed in 2008, parents may now defer repayment of their PLUS parent loans until their student graduates or leaves school, and for an additional grace period of six months following graduation.

The rules for PLUS graduate student loans are slightly different. As a graduate student, you may defer repayment on your Grad PLUS loans while you’re still in school at least half-time, but there’s no six-month grace period once you leave school. This timetable should be an important consideration and puts additional pressure on you to have a repayment plan in place before graduation.

Unlike some federal student loans, PLUS and Grad PLUS loans are not subsidized, so interest accrues on the loan balance from the time the loan is made, even if you’re currently deferring your loan payments.