Hard Money Lender? Yes or No?

Question

Should we a hard money loan to get a wholesale deal? Then try to refinance it after rehabbing? Does anyone know if banks will be strict to refinance the loan? I feel having another home loan we may not be able to get approved...

Thing is we don’t have full cash yet to buy a home out of pocket but credit is 727. Best deals I have seen are from wholesalers since we really want to start with one 110k and under.

Kerry Baird · Answer

You could always ask a local lender, “With my FICO here, debt to income ratio here, how much could I qualify for on an investment mortgage?” Determine your expected rents, for which a bank will typically give you credit for 75% of market rents. The concern is: Do you have the income/cash flow to support the refinanced payment.

Stephanie P. · Answer

Nayeli,

Lots of caveats here.

Be careful of the cost of the wholesaler's fee.  It may negatively impact the loan if it's too high.  HML's don't like layers.

Be mindful of your exit strategy.  If your property doesn't appraise high enough for your long term financing to stay over $75,000, your borrowing capacity will be severely limited and you may be forced to sell rather than refinance into a long term lending vehicle.

Banks WILL be strict unless you have a relationship with a small community bank that will portfolio the loan.  Usually that comes with a experience and significant deposits.  Otherwise, if using a bank, know you'll be subject to Fannie/Freddie guidelines and seasoning rules.

Best of luck

Stephanie

Doug Smith · Answer

The answer is "it depends". We try not to leverage (borrow money) in our funds as we have found that it not only eats up profit, but it makes the odds of loss higher if we are not able to sell or rent the property in a timely manner. I was a banker for 25 years before I left to manage the Castle Rock funds, so I know how banks think. Federal Regulators including the Federal Reserve and the FDIC look at a sampling of each bank's loan portfolio and they apply a "grade" to each loan to come up with a quality of the bank's loan portfolio. This rating impacts what the bank can borrow money for and dramatically impacts the bank's rating. With this in mind, regulators hate to see "investment real estate" on the loan purpose line of the application. Many banks even forbid their loan officers to make real estate investment loans unless the borrower is incredibly strong financially. Hard Money can be very expensive, so you'll want to model what it's going to cost you if things don't go quite as planned. I'm not sure if that helped or not, but good luck.

Jeff Cichocki · Answer

@Nayeli Sanchez,

Find a HML that also has LT financing options. There are many of us out there. Part of the reason we offer it so that we can pre-qualify your property for LT Financing. It's not a perfect science, but it's a good indicator when I can look at the property today to see if you would qualify for LT financing if the property is all fixed up.

Some LT Lenders let you take cash out when you refi (don't take any more cash out than necessary - the higher the LTV, the higher the risk of problems down the road). Most LT lenders will require you to have some liquid reserves. Some will let you use the cash out to meet the requirements.

Your situation if different than many of the people who will read this post. Each person needs to look at their scenario independent of the answers given. What you qualify for, someone else may not. Sometimes, it's not you, but the property that doesn't qualify. Again, you need to run this past an HML who also offers LT financing as well to get your exact answer.

Good luck!

Hard Money Lender? Yes or No?

Most Popular Reply