Traditional loans are usually the most difficult for real estate investors. Some lenders do not allow you to count revenues from investment property into gross income so you already own existing real estate loans that trust specific investors, in particular existing existing real estate loans For those who are in such cases, investors must look out for traditional funding for investment. Two of the more common choices for alternative loans are portfolio loans and hard money loans.
Portfolio loan
These loans are loans of banks that do not sell mortgages to other investors or mortgage companies. A portfolio loan is aimed at keeping them on the books until the loan is repaid or the deadline has come. Banks that do this type of loan are called portfolio lenders, usually smaller in scale, more focused on the community.
Benefits of portfolio loans
Because these banks do not deal heavily with the huge board of directors like commercial banks, portfolio lenders can do loans that commercial banks do not touch as follows:
- Less multivalent properties
- Repair Properties
- Properties with unrealized values after completion
- Pre-stabilized commercial building
- Single tenant operation
- Building for special purpose such as church, self storage, manufacturing space
- Construction and rehabilitation project
Another advantage of portfolio lenders is that they are involved in the community. Portfolio The lender wants to lend it to the property that he can go out and visit. They rarely lend them out of the area. This allows portfolio lenders to extrude guidelines if the number of transactions is not a star, but the lender can visit the real estate and see the value of the transaction clearly. In rare cases, commercial banking bankers rarely visit your estate. I also see more than what can be gathered from the evaluation report.
Disadvantages of portfolio loans
There are only three disadvantages in portfolio loans. In my opinion, it is worth the trade - off to receive the above services.
- Short term loan condition
- Higher interest rates
- Traditional underwriting
A portfolio loan usually has a shorter loan term than a conventional compliant loan. The loan has a standard 30-year depreciation, but we will pay the balloon within 10 years. At that point, you need to pay the loan in cash or refinance.
A portfolio loan usually has an amount slightly higher than the market interest rate. Generally, it is about 1/2 to 1% higher than the amount seen from major mortgage bankers and retail chains.
The lender of the portfolio may be out of the huge real estate guidelines, but you need to acquire qualification using the traditional guidelines. This means good personal financial statements, that it is better than the acceptable income ratio, global underwriting, coverage rate of high debt service, average credit. Failure to fulfill any of these criteria will result in a compromise of loans with most conventional lenders. There is a possibility that more than two will run for a portfolio loan.
If eligibility criteria are suffering and you live in a situation where it is not approved by traditional loan or portfolio loan, you need to visit the local hard money lender.
Hard Money and Private Money Loan
A hard money loan is an asset-based loan and means to be undertaken with due consideration mainly to the value of assets secured as collateral for loans.
Advantages of hard money loans
In rare cases, the lender considers creditworthiness as a factor of underwriting. If these lenders operate your credit report, there is a high probability that the borrowers are currently not going bankrupt and there is no open judgment or foreclosure. In most cases these things may not even be able to lend out coins from underwriting, but you may let the lender look closely to the document.
If you are purchasing real estate with a sudden discount, you can get 100% funding with coins. For example, if you are purchasing a $ 100,000 real estate owned by a bank at $ 45,000 you can earn that amount from a hard money loaner who makes a loan at the 50% loan to value ratio (LTV) I can do it. This is something that lenders of traditional portfolios can not do.
Private lenders are checking the income production capacity of assets, but because they exist at the time of lending, they are more interested in the present value of the assets defined as the value of the property they own. Hungry properties without rent income are rarely approved by traditional lenders, but it is a good impression for private lenders.
The speed at which a hard money loan transaction can be completed is probably the most attractive one. The speed of the loan is a major advantage for many real estate investors, especially those who purchase real estate in auctions and for foreclosures of short-term contracts and banks with short-term contract fuses. Hard money loans can be closed within 24 hours. In most cases, it takes 2 to 30 days. Also, even if the timeline of hard money is long, it is still shorter than the underwriting period of the past.
Disadvantages of hard money and private money loans
In general, private lenders will make loans between 50% and 70% of the current situation. Some private lenders use more conservative present-value values called "immediate sale" value or "30-day" value, both of which may be considerably lower than the standard appraisal value. Using quick sales values is a way for private lenders to make more discreet loans or a way to protect investments with lower effective LTV ratios. For example, you may have signed an agreement with an average marketing time of 3 to 4 months compared to other single-person households that have been sold recently between $ 15 and $ 150,000. Several coin lenders quote 50% of their purchase price as worth and lend $ 75,000 to purchase. Other private lenders will do BPO and may seek prompt sales value with marketing exposure time of 30 days. This value could be as low as $ 80,000 to quickly sell all funds to buyers. Therefore, these lenders will only lend up to $ 40,000 (50% of the $ 80,000 immediate disbursement) for an effective LTV of only 26%. This is often the point of competition in transactions underwriting coins lenders. Since hard money loans are done with a rather low percentage of value, there is little room for error when estimating the real value of your estate.
Another obvious disadvantage of hard money loans is cost. In most cases, hard money loans hold interest rates far higher than market rates, origination fees, stock compensation, exit fees, sometimes even higher lawyers, insurance claims, and title fees. Several coin lenders can finance these fees and include them in the entire loan but mean less net at the end of the loan.
Measure good and evil
Like any loan you need to measure the weight of good and evil, such as loan conditions, interest rates, points, fees, access to customer support. There is always a trade-off in alternative loans. If you indicate poor credit and you do not have the money for prepayment, the lender can claim a high interest rate and reduce the terms and compensate for additional risk.
When dealing with private lenders, please check the evaluation method.
Also, in the case of coin lenders, you need to pay attention to research and background checks. Hard money loans are one of the more common alternative financial options but are often targeted by malicious third parties. Be sure to issue all documents by qualified real estate attorneys and / or tax experts before signing the loan documents. If you suspect fraud or predatory lending, please contact the State Attorney General 's Office.
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