I apologize in advance for the long post but this is important information to have and I don’t want to leave anything out.
Recently, I have been seeing a lot of borrowers who were trying to pay off loans that had unfavorable loan terms that were causing them problems.
Honestly, I would call some of them predatory but the lending laws that define predatory lending don’t apply to business purpose loans so even if these terms are unfair, they are still legal in most cases.
Here’s what to look out for:
1) Default rate: a default rate is when the interest rate goes up in the event that you go into default on your loan. It can be triggered when you become late on the loan or when the balloon payment is past due. Depending on how it is written, it can be reduced back to the original rate when everything is paid current or it may stay at the higher rate until the loan is paid off. I have seen default rates where the interest rate went up by as little as 4% or by as much as 12%.
If you have had a lot of recent late payments, you may end up with a default rate but don’t accept one that you can’t deal with or one that keeps the default rate in effect even after you have paid everything current. The problem with a default rate that can’t be reduced is that it makes it incredibly difficult to make your payments, especially if your payment is increased by 50% or 100%.
2) Late payment penalty on a balloon payment: When a balloon payment is due and isn’t paid within the grace period that is granted on each other payment on the loan, some lenders charge a late payment penalty just as if the balloon payment were a normal payment.
This could be 10% of the loan amount which can make a huge difference and can make the difference between being able to refinance and losing the property in foreclosure. For example, if you borrowed $400,000 and there was a 10% late fee on your balloon payment. your penalty would be $40,000.
3) High attorney fees on a foreclosure: For California properties, it isn’t necessary to have an attorney involved in a foreclosure but some lenders do it anyway. This can add thousands of dollars in fees the borrower has to pay.
I just closed a loan for a borrower whose balloon had come due and the lender not only started the foreclosure process but also had an attorney involved. In addition to approximately $2,200 in foreclosure fees, there were over $14,000 in attorney fees which were entirely unnecessary. I can’t tell you who the lender was here because I don’t want to get sued but if you are getting a loan and want to know what to watch out for, I would be happy to tell you.
4) High loan fees: This one is very subjective but if you are paying over 5 points in fees and it isn’t a small loan, you can probably do better without trying very hard.
And if your loan includes a bunch of different fees, that could be an indication that you are being charged too much. We normally charge a processing fee and a document preparation fee but if you are also seeing things like an inspection fee, funding fee, document review fee or various other fees that you may not even know what they are really for, that may not be the place to go for a loan.
How you can avoid these things:
1) Make sure to read and understand the terms of your loan. If you don’t understand something, look up the words you don’t understand in a dictionary until you do understand what it says. A verbal explanation from your loan officer won’t change what it really means and the loan officer may not understand it either.
2) Don’t wait until the last minute to refinance your loan. The way a lot of these bad loans end up getting done is when a borrower is running out of time and doesn’t have any other options so they take whatever they think they can get.
Knowing when your loan is due or when it needs to be refinanced can save you a lot of trouble and money. I recently read the terms of a loan done by another broker that gave the broker the ability to automatically extend the loan for 6 months at a time and to charge the borrower 1.5 points (equal to 1.5% of the loan amount) each time they did it. At that point, they had made an extra $25,000 off of that borrower.
3) Make sure the loan will work for you. Even if it is a temporary solution, it is vital that you know you can meet the terms of the loan and, if necessary, get out of it and into a better loan as soon as possible.
Even if you are in a tight spot, it doesn’t make sense to take a loan you either can’t make the payments on or can’t get out of. You would probably be better off selling the property and getting your equity out of it.
4) Don’t believe anyone who says you have no choice but to accept their offer. It is incredibly rare that there is only one lender who will do a loan and most loan officers who tell you that you don’t have any choice are really just using pressure tactics to get you to do the loan.
This is a classic shady sales tactic and usually tells you the loan officer is not really on your side. They may only have one option for you but if you don’t like it or it doesn’t work for you, don’t take it.
5) Do everything you can to keep your mortgage payments current. This will help to put you in a position to get a better loan and not have to deal with any of these terms. However, some lenders who offer lower rates will still include some of the terms listed above.
My preferred lender for non-hard money alternative loans offers 30-year loan terms instead of short term loans with default rates and other potentially predatory terms. What this really means is that there are options and you don’t have to take a loan you don’t like just because it is the only thing being offered.
The purpose of this post is to explain how to avoid a property tax sale for those who find themselves getting behind on their property taxes. There is no doubt that it can be a scary situation but there are solutions.
In California, a property can be sold at auction after property taxes have remained unpaid for 5 years. Depending on whether you are looking to save a property from a tax sale or buy one at a tax sale, this could be good or bad.
For those who have fallen behind on property taxes, it is important to know what to do to avoid losing your property. Knowing the 5-year rule gives you the timeline for when it could happen. If you are two or three years behind, you still have some time but if you have reached the 4-year mark, it’s time to do something now before it’s too late.
Some county tax collectors will let you make a payment arrangement to get caught up on your taxes but if you are too far behind, they may not agree to do so.
Another solution is to get a mortgage on the property to get the taxes caught up. In many cases, the new lender will want to have property taxes collected with your mortgage payment to prevent the same situation from happening again.
Delinquent property taxes don’t go on your credit report so they won’t hurt your credit score. This makes it possible to get a regular bank loan if everything else fits their guidelines. But if you can’t get a bank loan, hard money can be used to solve the problem if there is enough equity in the property.
Fortunately, hard money can be a fast solution to this. I have done multiple loans in the past to help homeowner’s save their property from tax sales. The first one I ever did closed in 4 days, closing on the final day before the auction. It was a close call because the client waited until the last possible moment to try to get a loan.
Yesterday, I got a call from a loan officer who has a client who inherited some properties and didn’t realize that because it wasn’t from a parent, the property taxes had increased after each property was reassessed. The client kept paying the old amount which is thousands of dollars less per year and is now in danger of having their these properties sold at auction to pay the delinquent property taxes.
To make matters worse, the properties this client owns are free and clear (meaning they have no loans on them). Yikes! That could be a disaster!
The loan officer who called me can now help their client save the properties with hard money loans as a temporary solution until a more long-term solution can be found. This will avoid the loss of hundreds of thousands of dollars.
For more information on how to get a hard money loan, regardless of the reason it is needed, fill out the contact form no this website or call today.
What is a Bridge Loan?
There is a common misconception that a bridge loan is just a short term loan. Correctly defined, a bridge loan is where someone is buying one property before selling another one and they need to get a short term loan until they sell the property they already own.
It is called a bridge loan because it bridges the gap between buying a new property and selling a property you already own.
The problem is that banks don’t do bridge loans. They focus on the very plain and uncomplicated loan types that don’t require a lot of expertise or creativity to figure out. This is probably because most banks sell their loans and the people who buy them are investors, not seasoned mortgage professionals.
One of the many different uses of hard money is the bridge loan. Hard money is the ideal vehicle for them because decisions in hard money are generally made by an individual and not a board of directors. And even if the individual who is lending the money isn’t an expert in mortgages, he or she can be educated quickly so that they understand.
So how do bridge loans work?
There are 3 ways to do a bridge loan:
1) The loan is secured by the property being bought.
2) The loan is secured by the property being sold.
3) The loan is secured by both properties.
Which one is best will depend on the situation. Some of the factors involved are how much down payment there is (if any), how much equity is in the property already owned, the value of the property already owned and the purchase price of the property being bought.
Most bridge loans are for 12 months or less although that can be negotiable. This is why some people think of any short term loan as a bridge loan.
One of the biggest advantages of bridge loans is that the requirement for proving income is waived for this type of loan, regardless of whether either of the properties will be owner occupied or a rental property.
If there was a single thing that one should know about bridge loans, it is that they are all about figuring out how to make the numbers work. Anyone who is expert at doing them should be able to figure out the numbers in a couple of minutes and let you know if there is a way to do the loan.
So if you have any questions about whether you qualify for a bridge loan or if one could solve the problem of trying to buy one property before selling another one, ask someone who has done them before.
Most people think that hard money loans (also known as private money loans) qualify as creative financing. But the truth is that just because a loan is hard money, it doesn’t mean that it’s creative.
Someone who has bad credit or a property that is in poor condition will probably have to use hard money for a mortgage. But it can be pretty straightforward and doesn’t need to be creative at all.
If you look at the facts, getting a higher interest rate and probably paying more points than you would for a different type of loan doesn’t seem very creative.
So what does a creative loan look like?
One example that we just closed this week involved a guy who wanted to buy a property but didn’t have any money for a down payment. And since there aren’t any loan programs for buying a rental property with no money down, most loan officers would have turned him down.
But that isn’t what happened.
It turned out that he owned another house that had a lot of equity in it. So instead of turning him away, we used that equity so he could buy the house he was interested in. The loan used both properties, being a first mortgage on the one he was buying and a second mortgage on the one he already owned.
Another example is a borrower who needed to refinance a property that had major fire damage. The property had 3 units before the fire and two units afterwards. Obviously, no bank would give anyone a loan on that property.
But we came up with a solution to it. Instead of going through the complicated process of doing a construction loan, we had the property appraised based only on the two remaining units.
Since the loan was based on the as-is value, there was no need to have any money held back to cover construction costs. The borrower had been looking for a solution for a while and was unable to find anyone to help them. Fortunately, the solution seemed pretty obvious to us and we got the loan done quickly.
There are many other examples of how to take a situation that doesn’t seem to have a solution and figuring out a way to be creative, coming up with a simple solution to get the problem handled.
So when you think of creative financing, it isn’t true that all hard money is the same. It is important to find someone who cares enough to look for the solution to your problem, whether that person needs to be creative or not.
The best way to look at it is to find out if there is a simple solution. Complicated doesn’t usually work and causes confusion. Simple is almost always better.