Top 5 Things to Know Hard Equity Financing
By Elizabeth Dougherty
Hard equity financing, also referred to
as an investor loan, is a rarely used and
often misunderstood form of borrowing
by the average consumer. Back in the 80s,
when rates were high, investor loans really
came into their own. Companies with full
underwriting and processing capability
formed to help investors who wanted to
loan money on real estate.
The reason it is important to understand
this finance vehicle is in the event you are
unable to obtain conventional financing
for whatever reason. This is a last chance
type of loan. The best thing about this type
of loan is that credit and income are not
considered. While used often by investors
to purchase multiple properties, it's not the
sort of rate and terms you want to be paying
for any length of time. So, here are the top
5 things to be aware of when obtaining an
investor loan:
1 Loan to Value
When investors loan on real estate, they
have a formula they use. Typically they only
loan on first mortgages and they do not like
to exceed 65 percent of the value of the
home. If you are trying to roll in closing costs
etc., you probably won't be able to give the
seller more than 50 percent of the purchase
price at closing.
2 High Rate
Expect the rate to be astronomically high.
How high is that? It will likely be 12
percent or more. If you can find a lot of
investors that work through one servicing/
underwriting company, they might be a little
more competitive. Some will go as low as
9 percent and others will go as high as 18
percent.
3 Points
Points will be charged on the front of
the loan. A point is 1 percent of the loan
amount. Again, there is a range among
investors. Some will charge as little as 1
point, others go as high as 5 points. If there
is a mortgage broker involved, they will
charge points also. Most states don't allow
there to be a total of more than 10 percent
in front loaded fees.
4 Title Company
Many investors work through particular title
companies or attorneys. Overall, they are
very meticulous about the closing process.
After all, they are loaning their own money.
At the very least, expect to have to pick a
title company they have approved.
5 Default
Realize that, if for some reason, you don't
make your payments on time, the default
process will be swift and unpleasant. Your
investor is not like a conventional bank with
workout procedures and customer service.
They will simply call their attorney and begin
foreclosure proceedings if you fail to live up
to the terms of the mortgage document. You
may wish to have your attorney review that
document before closing to make sure all
the items in it are standard.
While investor financing is not always the
best way to buy or borrow on real estate, it
does have it's place. If you are going to flip
a property, it can be one of the best ways to
do it quickly. For the long term though, stick
with conventional programs if at all possible.
Elizabeth Dougherty, a resident of
Auburn, is a former Real Estate Broker
and Mortage Broker. She can be
reached at EADougherty1@aol.com.
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