Loan Terms To Watch Out For (And How To Avoid Them)

Loan Terms To Watch Out For (And How To Avoid Them)

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.

Bridge Loans – How To Use Them

Bridge Loans – How To Use Them

The most common use of a bridge loan is when you don’t have the money to buy a property until another property is sold but you don’t want to wait. Often, it is because the seller won’t wait or you don’t want to take a chance on missing out on that property.

Bridge loans are designed specifically to help you through this sort of problem by providing short term financing so you can buy the property now and handle the long-term solution later.

There are three ways to do a bridge loan.

The first is to get a loan on the property being purchased. This is the least common one but can still be beneficial when it is needed.

The second is to get a loan on the property being sold. This is commonly done when there is a small lien  or no lien at all on the property already owned. Often, this type of bridge loan is done when the buyer is downsizing or buying a less expensive property.

It is sometimes done when there isn’t enough money to buy the new property for cash but there will be enough after the first property is sold. Or, it can be done when the buyer can’t qualify for loans on two properties at once. After the first property is sold, a new loan can be gotten on the new property.

The third way of doing a bridge loan is the most common. It is where the loan is secured by both the property that is already owned and by the one that is being purchased. In this case, it is important to fully understand how things will work when the first property is sold.

If there will be enough money from the sale to pay off the loan, there is no problem and there are no complications. But what if the property being sold will produce $400,000 and the loan amount is $500,000.

In this case, it should be arranged ahead of time (in the loan documents) that when the first property is sold, it can be released as collateral for the loan by paying down a portion of the loan.

This puts you in position to do things in the proper order and to not have to be stressed out about getting two transactions to close on the same day (the sale of one property and a new loan on another).

After all, a bridge loan is supposed to help reduce stress, not create more of it.

 

What You Should Know About Hard Money

What You Should Know About Hard Money

The first thing you should know is that a lot more loans can be made to work than most people would expect. It comes down to figuring out what the options are and if any of them will work for you. In some cases, the best decision is to wait and not do anything yet.

Once you have that idea in mind, it is important to know that there are a lot of different ways of using hard money. The most common one is buying an investment property with the intention of fixing it then either selling or refinancing it.

Another common use is by real estate investors who can’t qualify for a bank loan but want to buy investment property. This one is especially useful in areas where the properties have lower prices.

After that comes the business purpose loan where someone takes money out of a property they already own and uses the cash for business. This could be to pay business debts like credit cards, to buy another property, invest in a new or already existing business or many other things.

Then there is the refinance of a loan that has a balloon payment that has come due. I have seen a lot of these in the last few months.

The last category is where someone wants a loan for personal use. It could be to buy a home to live in before you can qualify for a bank loan. Sometimes, another property has to be sold before the bank will give you a loan or something needs to be done on your credit and you can’t wait for that to buy the house you really want.

And of course there are other uses. The bottom line is that if you can’t get a bank loan and need a mortgage, hard money is a good place to check and see if it can be used to solve your problem.

It can be used to get creative solutions that other lenders just won’t do.

Most importantly, hard money is a good place to check when all other options have failed. Yes, the rates are higher than other types of mortgages but if the numbers work, it can be a good solution to get you where you want to go.

Bank Statement Loans

Bank Statement Loans

Last week I announced that non-prime loans are back and in this post I want to give more information about one the loan types that fit into this area: bank statement loans.

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This loan type is specifically for business owners and independent contractors.

It was designed to help in those situations where there is enough income but where income taxes won’t work because there are too many write-offs, resulting in a low net income on your income taxes.

Using bank statements to prove income can make it possible to buy a home or refinance one even though banks can’t help you.

These loans can be done with business bank statements or personal bank statements. This can be very helpful for those who don’t have separate bank accounts for their business and personal money.

This program can even be done if you have a regular job and a side business. In that case, we would get pay stubs to show income from your job and bank statements to show income from your business.

It wasn’t too long ago that I did one where the borrower had a regular job and a had a side job as an independent contractor. In that case, his taxes hadn’t been filed yet so the only way to get him approved was by using the bank statement program. It worked beautifully and I was able to get him about $200,000 in cash out of his property and still reduce his monthly payment.

And in case you were wondering, these loans have rates fixed for 30 years and for owner-occupied homes, there are no prepay penalties.

At the moment, the minimum credit score for this program is 640. If you need help getting your score up to that, give us a call and we can coach you on what to do to increase your score.

For more details and to see if this program could work for you, call us or fill out the contact form on the Contact page of this website and we can go over your situation to find what solutions are available.

Non-Prime Mortgages Are Back!

Non-Prime Mortgages Are Back!

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You may remember a couple of months ago when I told you that many of the loan programs that had been available didn’t exist anymore. Whether you remember or not, I have some good news!

Some lenders who stopped doing loans a couple of months ago have come back into the market and started lending again. The programs have changed a little but they are not too different from what was available before.

Of course, some of the more aggressive aspects of their loan programs do not exist today and that is probably a good thing because some of them made those loans a bit too risky. I am all-in to help people who should be able to qualify for a loan but can’t get help from banks. But making risky loans caused some problems around 2008 and we don’t want a repeat of that.

Back to my announcement that non-prime loans are back.

When non-prime lenders left the market and stopped lending, a huge void was created between bank loans and hard money loans. For those who could normally qualify for something in the middle, they either had to pay the higher rates of hard money or they had no options at all.

The huge void that was created when those lenders left is no longer empty. Having these types of loans may not seem like a big deal but for those who can qualify for them, it can make a huge difference in what they can afford, whether it is for a home they are going to live in or an investment property.

In case you aren’t fully familiar with non-prime lending, it is the type of mortgage that exists to help people who fall in between bank lending and hard money. Simply stated, the qualifying guidelines and rates are easier than bank loans and the rates are better than hard money.

They are similar to the old subprime loans but without the major faults of those old programs, like having a 2-year fixed rate and a 2-year prepay penalty.

There are a lot of details that would probably bore you to tears so rather than give you all of them, I will just list some of the highlights:

  • All loans have fixed rates for 30 years
  • Rental properties can use rental income to qualify
  • Bank Statements can be used to prove income
  • No prepay penalties on owner occupied properties

Since there are many other details, if you want to know if this type of loan can help you, call us or go to the contact page of our website and submit a contact form.

How To Avoid A Property Tax Sale

How To Avoid A Property Tax Sale

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.

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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.