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.
For the past couple of months, a day hasn’t gone by that didn’t contain COVID-19 in our everyday conversations. While this is distracting at the very least, there are other effects besides people getting sick and the economy being mostly shut down.
And for the record, COVID-19 did not cause the economy to shut down. The hysteria caused by mainstream media and certain politicians is what has caused most everything in our economy to stop.
I can’t say for sure whether the shutdown was intended to cause damage to the world economy but I believe it was, just like the “Great Recession” was engineered by the big banks so they could make billions of dollars while the economy crashed and many smaller banks went out of business. (I could go on about this but that is a subject for another post.)
With the economy shut down, it is no secret that many people have been hurt financially. No one knows the full extent of the damage at this point but it will certainly be talked about in the months and years to come. The fact is that the most damaged will be small businesses.
Unfortunately, small businesses employ more people than big businesses do. This fact makes it clear that when you damage small businesses, you are hurting the majority of the population. And in spite of bailout money (which I still haven’t seen anyone receive, regardless of the claim that all the money has been spent), many small businesses are facing difficult times, now and in the near future.
This will cause some of them to close, affecting not only the business owners but also employees and their families. More people will miss mortgage payments, credit card payments and car payments because of reduced or no income.
And while I cannot tell a client not to make a payment (this is against the law for someone who is a licensed loan officer), I will say that people will need to make choices.
When you can’t make all your payments, you will need to prioritize your bills. Food, while not technically a bill, has to be a top priority. Rent or mortgage is next. Car payments could be next. credit card payments will likely be at or near the bottom of the list.
No one wants their credit score to go down the tubes but we all have to make choices. One’s credit score may have been a top priority when things were easier but when it comes down to a choice between your credit score and keeping a roof over your head or feeding your family, to hell with the credit score. You can fix that later.
People are going to have late payments. They are going to have higher credit card usage. They are going to be looking for more credit to get through the problem of having less income. All these things are going to cause a decrease in credit scores.
There will be millions more people looking for solutions to their credit. Some of these people will go to credit counseling services that may or may not explain to them that their credit scores will most likely drop like a stone. Others will sign up for credit repair to fix the problem. Maybe it will, depending on what company you choose.
But none of this changes the fact that the average credit score is going to go down in the aftermath of COVID-19. People will need solutions to get their credit scores fixed. And there are solutions. Choose wisely.
Before the housing crisis in 2008, there were many types of mortgages available to the consumer. There was “A” Paper for those with perfect credit, provable income and a property in good condition.
There was Alt-A (alternative to A paper) was for borrowers who almost qualified for an A paper loan but who had a minor flaw that prevented them from qualifying.
Then there was subprime, which was available for those who didn’t have good credit.
Finally, there was hard money. It was for those whose credit wasn’t good enough for a subprime loan or who needed a small loan, often a 2nd mortgage.
After the market crashed in 2008, the only things left were A paper and hard money. If someone couldn’t get an A paper loan, their only option was hard money.
The result was that many borrowers with reasonably strong profiles were getting hard money loans. In some cases, these people had credit scores well over 700 but either had trouble proving their income or had a property in poor condition.
Investors were funding these loans with rates in the 10-12% range and had little trouble finding opportunities. Then, more investors started lending. This increase in investors drove rates down on many loans, with some going as low as 7% for cleaner deals.
Then non-prime loans started to surface and took a big chunk of the hard money market. Their rates were lower and they could do more of the owner occupied properties. They could also work with lower down payments.
Over the last couple of years, I have had many investors ask me what happened to all the sweetheart deals they used to see. The answer has been that the non-prime loans have eaten lots of them up, leaving the more traditional hard money loans. These were the borrowers who had bad credit (bankruptcies, foreclosures, short sales, late payments, etc.), ugly properties and no provable income.
But with our current scene of having most businesses either closed or operating with reduced volume, non-prime loans have taken a break. Right now, they aren’t lending. You can go to the websites of these companies and see that they have “paused lending activities”.
This does add some uncertainty to the market but we don’t really know how much it will affect values or for how long. My opinion is that I think values will drop but not by a large percentage. Here’s why.
The vast majority of mortgages go through the banks. Since 2010, all mortgages going through banks have required proof of income. They have also required larger down payments on all rental properties along with proof of assets. Additionally, according to Zillow in July 2019, 37% of the homes in America are owned free and clear.
Combining these factors, you can see that this is a much stronger base than the house of cards we were dealing with in 2008. Plus, we don’t have the same problem of rampant mortgage fraud and predatory lending that we had in 2008.
Where do we go from here?
Right now is a good opportunity for private money/hard money investors to lend to borrowers who are stronger than the most common hard money borrowers. In the last couple of weeks, I have been approached by more people who had good credit and strong profiles than usual.
Some of them will wait to make a move because they don’t want to get a hard money loan but others will get the loan that will solve their immediate problem and plan to refinance when things settle down a little. And some will be interested if the rates are a little lower (7-9%).
In looking at these deals, you may need to do lower interest rates than you are used to. But if you can get stronger borrowers with more equity in the property, isn’t that better than having your money sitting in a bank earning effectively no interest? Of course it is. Just make sure you do your due diligence and make sure you have a solid loan.
If you have questions about how to analyze a deal, please call (707) 401-8080 or fill out the contact form on this website.
Since we specialize in helping those who cannot get a loan from the banks, we have a different perspective when we look at a loan file.
Rather than looking for something wrong to see if the loan should be declined, we look for reasons why the loan should be approved. In other words, we look for the strengths of the file and not just the weaknesses.
Of course we have to look at the weaknesses so that we know what they are and how our investors might view the file. But we also look for reasons why the loan could make sense. Balancing these two things gives us a more complete understanding of the loan and opens the door to getting it approved when others would say no.
As a borrower, you may only be thinking of the things that could prevent you from getting a loan. However, these weaknesses in your situation can be handled in many situations.
Here are a few common situations and how they can be overcome.
- Bad credit: If you have low credit scores or recent “credit events” like a bankruptcy or foreclosure, there is usually a reason. Giving a complete explanation of what happened is helpful. But the thing that really helps is an explanation of how it is either already handled or how the loan you are applying for will handle it.
- Property is a fixer: If you own a fixer or are buying one, the value will increase as you improve it. Having a clear plan on how you will do this can make the difference between getting approved or being turned down.
- No money for a down payment: Some people own a property already that has little or nothing owed on it. They want to buy another property but have little or no cash for the down payment and closing costs. The property they already own can be used as collateral for the down payment.
- Another little known tip to getting your loan approved is to tell us everything. If we know the details on what you are trying to do and the barriers to getting it done, it is much easier to handle the barriers and figure out a solution.
There are so many different situations that it would be nearly impossible to list everything in a single post or even a whole book. But if you or someone you know has a difficulty in getting a loan, we may be able to help.
The thing that really sets us apart from other lenders is not just that we really care and want to help. It is that we are very good at looking at your whole situation and figuring out the solution that will work to solve the problem.