In my previous post on the subject, I mentioned that hard money loans are based on available equity. Or the amount of loan requested vs. the property value. In addition, I mentioned that estimating the value of a property was not easy but that using the 90 days rule, combined with income potential or actual would help. Clearly for commercial properties, income will be the way to go for valuation. While these criteria give us a good insight on hard / private money loans
A hard money real estate loan, for both commercial and residential properties, is a loan that does not meet the underwriting requirements of conventional lending institutions. Another way to look at it, hard money loans are customized to the specific conditions of each application. Customization could be related to the property, the borrower the terms of the loans, the market etc… An argument could be made that a hard money real estate loans are all loans that are not funded under conventional underwriting standard and are more expensive.
In addition, to equity and property valuation here are few more criteria defining what hard money loans are. Loan costs are significantly higher. Borrowers will pay anywhere from 3 pts to 6 pts in fees. One point is equal to 1 percent of the total loan amount. This reflects the costs of doing loans that are customized. Loan costs also reflect the perceive risk that a lender is taking. The higher the perceived risk from the lender’s perspective the higher the costs of the loan will be.
As part of the loan costs the interest rates charged per loan will be a component of defining a hard money loan. In general interest rates charged will be above 10%. You can find in some cases lender offering loans between 9% and 10%. These programs are really limited and very specific to certain transaction. Anything below 9% will be more of a customized conventional loan that requires a little underwriting flexibility.
To summarize a hard money loan is defined by its primary underwriting criteria, available equity. Its costs in terms of points and the interest rate charged.
Monday, April 20, 2009
Wednesday, April 15, 2009
Defining Hard Money Loans
More and more I am getting questions about hard loans from borrowers and/or brokers who have never contemplated getting one or originating one for their clients. Some of the questions are related to underwriting and some to costs. Other questions are about ltv, property types, terms etc… Here I want to start addressing these questions and continue to provide insight on hard money or private lending. One point that I would recommend to keep in mind all private lenders have slightly different ways to underwrite and approve loans. This is good for borrowers as they can be turned down by one lender and approved by another one.
Let’s looks at some of the criteria that make a loan a hard money one. The primary criteria that all private / hard money lenders will agree on is that these loans are based on available equity in the property or loan to value (LTV). However, conventional real estate lenders both for residential and commercial properties have for primary criteria credit. In regard to the LTV, If the loan amount requested is too high in relation to the value of the property then the loan will be turned down. Hard money lenders today do not fund loans above a 70% LTV. In general depending on the area of the country and within states, it will be no more than 60% to 65% of the property value.
Going back to credit and Fico score. If a borrower has good credit it does not mean that his/her hard money loan will be approved. Good credit is only one of the criteria of the approval process. Also, this will not improve the rate that the borrower will get it just makes it more interesting. Today, as we have discussed in previous post, most hard money borrowers have good credit.
In today’s real estate market the property value is really crucial no matter if you try to finance a property through conventional means or through private-hard money sources. Again this both affect commercial and residential borrowers. Commercial valuations are in a way more accurate than residential ones as they are normally based on income. As with everything else there are always exceptions to the income valuation. Residential real estate is valued mostly based on its "perceived” exchange value. This is for most people the main sticking point nobody can really agree on what that means. I would recommend as a basis to think in term of 90 days. The value of a property can be based on its exchange price, if it had to be sold within 90 days. If the real estate industry was to ask appraisers to provide valuations based on this criterion, we all would have a much better idea of a property value.
More and more we are seeing values for residential properties based on the income they would generate if rented out. This is becoming a very important factor when approving financing for residential investment properties.
Let’s looks at some of the criteria that make a loan a hard money one. The primary criteria that all private / hard money lenders will agree on is that these loans are based on available equity in the property or loan to value (LTV). However, conventional real estate lenders both for residential and commercial properties have for primary criteria credit. In regard to the LTV, If the loan amount requested is too high in relation to the value of the property then the loan will be turned down. Hard money lenders today do not fund loans above a 70% LTV. In general depending on the area of the country and within states, it will be no more than 60% to 65% of the property value.
Going back to credit and Fico score. If a borrower has good credit it does not mean that his/her hard money loan will be approved. Good credit is only one of the criteria of the approval process. Also, this will not improve the rate that the borrower will get it just makes it more interesting. Today, as we have discussed in previous post, most hard money borrowers have good credit.
In today’s real estate market the property value is really crucial no matter if you try to finance a property through conventional means or through private-hard money sources. Again this both affect commercial and residential borrowers. Commercial valuations are in a way more accurate than residential ones as they are normally based on income. As with everything else there are always exceptions to the income valuation. Residential real estate is valued mostly based on its "perceived” exchange value. This is for most people the main sticking point nobody can really agree on what that means. I would recommend as a basis to think in term of 90 days. The value of a property can be based on its exchange price, if it had to be sold within 90 days. If the real estate industry was to ask appraisers to provide valuations based on this criterion, we all would have a much better idea of a property value.
More and more we are seeing values for residential properties based on the income they would generate if rented out. This is becoming a very important factor when approving financing for residential investment properties.
Friday, April 10, 2009
Difficulties In The Upper End of The Residential Real Estate Market!
We are continuing to see important fluctuations in these markets. The financial markets are moving widely, 10 days ago the Dow Jones index was below 7,000 and yesterday it closed above 8,000. The residential real estate market is stabilizing in some areas and in some other areas it is just starting to experience major decline. In a Bloomberg.com article by Oshrat Carmiel “Hamptons, N.Y. Home Sales plunge 67% in First Quarter”, the author outlines the difficulties that the higher end of the residential real estate market is experiencing. Not only the number of transactions went down significantly, but prices declined by an average of 30% for the first quarter of 2009. The author was using the Hamptons, N.Y. market as an example. On the lower end of the market first hit by pricing decline 24 months ago, we are seeing more mixed results and even an increase in demand.
More and more private / hard money lenders are receiving request for financing for the upper end of the market. It is pretty common today to get request for loans on single family residence and condos for properties with values above $1M, with numerous financing requests for loans above $1M. The difficulty is to fund these loans especially if borrower cannot justify their ability to make monthly payments. Hard money lenders don’t want to have to foreclose on properties that are this expensive and get stuck with them.
Three factors are affecting the upper end of the real estate market. The first factor is the lack of capital available in general in the banking system. The second factor is that banks are making it very difficult for borrowers who need loan above $650k to get a loan. Basically it is very difficult to get a loan unless you don’t really need it. The third factor is that numerous people in the upper income bracket have and are losing their jobs. This means that either they have to put their property on the market, or they can’t upgrade reducing the demand for these properties. The upper end of the market may be affected until 2010. In the following article from Reuters “U.S. recession to end in H2 but unemployment to rise: survey”, economist surveyed are saying that while the economy will improve by the end of 2009, unemployment will continue to increase until mid 2010.
From what I have seen in the past few years in both the financial and real estate markets, hard money lenders are going to continue to see a demand for financing for the upper end of the residential real estate market. This will come in addition, to an increase in demand for financing for commercial real estate and the lower end of the residential market. My advice to real estate professional would be to make sure you have strong file when contacting a private lender. My advice for borrower: be flexible when looking for financing.
In our next post we will consider some of the challenges that hard money lenders are facing with funding loans.
More and more private / hard money lenders are receiving request for financing for the upper end of the market. It is pretty common today to get request for loans on single family residence and condos for properties with values above $1M, with numerous financing requests for loans above $1M. The difficulty is to fund these loans especially if borrower cannot justify their ability to make monthly payments. Hard money lenders don’t want to have to foreclose on properties that are this expensive and get stuck with them.
Three factors are affecting the upper end of the real estate market. The first factor is the lack of capital available in general in the banking system. The second factor is that banks are making it very difficult for borrowers who need loan above $650k to get a loan. Basically it is very difficult to get a loan unless you don’t really need it. The third factor is that numerous people in the upper income bracket have and are losing their jobs. This means that either they have to put their property on the market, or they can’t upgrade reducing the demand for these properties. The upper end of the market may be affected until 2010. In the following article from Reuters “U.S. recession to end in H2 but unemployment to rise: survey”, economist surveyed are saying that while the economy will improve by the end of 2009, unemployment will continue to increase until mid 2010.
From what I have seen in the past few years in both the financial and real estate markets, hard money lenders are going to continue to see a demand for financing for the upper end of the residential real estate market. This will come in addition, to an increase in demand for financing for commercial real estate and the lower end of the residential market. My advice to real estate professional would be to make sure you have strong file when contacting a private lender. My advice for borrower: be flexible when looking for financing.
In our next post we will consider some of the challenges that hard money lenders are facing with funding loans.
Friday, March 27, 2009
The Changing Nature Of Hard Money Borrowers
Not only has the way hard money loans are underwritten and funded changed but borrowers too. Until 18 months ago hard money borrowers were in situations so difficult that they could not get financing from banks. At the time, up to mid August 2007, subprime loans were available and only a limited numbers of borrowers needed access to hard money loans. These loans were mostly bail out loans or sometimes for “special” properties.
For the past 18 months hard money borrowers profiles have completely changed. Today bail out loans are not being approved anymore except in cases where there is so much equity that the lender cannot loose. Hard money borrowers, today, are investors with good credit or first time borrowers who need to go stated income and who are buying REO properties. Today if a borrower has a credit score below 590 the likelihood that their loan will be funded is low. However, such as everything in private lending there are always plenty of exceptions.
The typical borrower today will be most likely a buyer. In general this borrower will be open to put 30% to 35% down and in some markets up to 40%. The average Fico for current hard money borrower is 670 and up. We see numerous borrowers with Fico above 700 and sometimes above 750. Most borrowers have assets in excess of the down payment and closing costs. However, for first time home buyers there is less reserves than for investors. Finally most borrowers are employed or can show income. This apply primarily to residential borrowers. For hard money commercial borrowers the same apply.
For the past 18 months hard money borrowers profiles have completely changed. Today bail out loans are not being approved anymore except in cases where there is so much equity that the lender cannot loose. Hard money borrowers, today, are investors with good credit or first time borrowers who need to go stated income and who are buying REO properties. Today if a borrower has a credit score below 590 the likelihood that their loan will be funded is low. However, such as everything in private lending there are always plenty of exceptions.
The typical borrower today will be most likely a buyer. In general this borrower will be open to put 30% to 35% down and in some markets up to 40%. The average Fico for current hard money borrower is 670 and up. We see numerous borrowers with Fico above 700 and sometimes above 750. Most borrowers have assets in excess of the down payment and closing costs. However, for first time home buyers there is less reserves than for investors. Finally most borrowers are employed or can show income. This apply primarily to residential borrowers. For hard money commercial borrowers the same apply.
Thursday, March 12, 2009
The Changing Nature of Hard Money Lending
Just this week a broker whom I work with regularly asked me why do we need some type of income documentation from her client? If we go back to what was Hard Money lending even a year ago this is a legitimate question. Remember when the only documentation that was needed to approve a loan was a breathing borrower, a 1003 and a property, today it’s a different world. Investors and lenders have learned that caution is the norm and that property can loose value. To illustrate theses changes here is an article from the AP, "When economy bottoms out, how will we know?" by Alan Zibel, Christopher Leonard and Tim Paradis, Business Writers
A different lending approach is being developed in the hard money world. Today you could define Hard /Private Money lending as flexible lending. Until mid August 2007, Hard Money lending was pretty much borrower’s bail out lending. When you could not get money from banks you were going to a hard money lender. Two primary reasons at that time either you were so desesparate as a borrower or the property was in such a bad shape that no conventional or subprime lenders could approve the financing. Here I am referring to residential lending as the commercial market was a little more reasonable.
The assumptions made by “most” private lenders at that time were that property values will continue to increase and that other sources of funds would be available to take out their loans. Since then the lending and financing world as radically changed. Values have collapsed and there is no capital available to do financing. Assumptions made are no more valid, thus private lending had to take a different approach.
Today private lending is more of flexible lending than bail out lending. Bailout loans are still being considered but at very low loan to values. Most of private lending today is done for investment properties and commercial properties that can not get bank loans. Banks do not approve loan for more than 4 residential properties. No more stated income loans, so self employed people are suffering, especially self employed investors. Hard money loans for borrower with low Fico (below 600) will be more complicated to get. In addition, more and more lender want to make sure that the borrower can make the mortgage payments.
In our next few posts we will continue to address these issues.
A different lending approach is being developed in the hard money world. Today you could define Hard /Private Money lending as flexible lending. Until mid August 2007, Hard Money lending was pretty much borrower’s bail out lending. When you could not get money from banks you were going to a hard money lender. Two primary reasons at that time either you were so desesparate as a borrower or the property was in such a bad shape that no conventional or subprime lenders could approve the financing. Here I am referring to residential lending as the commercial market was a little more reasonable.
The assumptions made by “most” private lenders at that time were that property values will continue to increase and that other sources of funds would be available to take out their loans. Since then the lending and financing world as radically changed. Values have collapsed and there is no capital available to do financing. Assumptions made are no more valid, thus private lending had to take a different approach.
Today private lending is more of flexible lending than bail out lending. Bailout loans are still being considered but at very low loan to values. Most of private lending today is done for investment properties and commercial properties that can not get bank loans. Banks do not approve loan for more than 4 residential properties. No more stated income loans, so self employed people are suffering, especially self employed investors. Hard money loans for borrower with low Fico (below 600) will be more complicated to get. In addition, more and more lender want to make sure that the borrower can make the mortgage payments.
In our next few posts we will continue to address these issues.
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