Archives For mortgages

Seller Financing

In some situations, sellers are lining Lending Standards, Seller Financing. CFPB
Finalizes Loan 2013, The Consumer Financial Protection Bureau
www.realtor.org/topics/seller-financing – 2012-03-15

Seller Financing May Be Worth Exploring | Realtor Magazine

In today’s stymied real estate market, lenders are more cautious about making loans and sellers are more inclined to agree to carry financing to sell their properties more quickly. Here’s a look at how installment sales could work for your clients.
realtormag.realtor.org/law-and-ethics/law/article/2008/12/seller-financing-may-be-worth-exploring – 2008-12-01

Get Seller Financing to Work for You | Realtor Magazine

Seller financing has been a hot issue in recent real estate news due to the changes in regulations, specifically in the Dodd-Frank Act. Here’s what you need to know to incorporate this method into your business strategy and be the best advocate for your clients.
realtormag.realtor.org/law-and-ethics/feature/article/2015/04/get-seller-financing-work-for-you – 2015-04-06

Seller Financing: Background

Seller financing is subject to new rules following the passage of financial reform legislation. Know these changes in order to serve sellers better.
www.realtor.org/topics/seller-financing/background – 2012-01-17

My Account

Seller financing plays an important role in financing the sale of real estate, especially when credit is tight. This paper summarizes the impact of two federal laws that affect seller financing. Seller financing plays an important role in financing the sale of real estate, especially when credit is tight. This paper summarizes the impact of two federal laws that affect seller financing.
www.realtor.org/reports/seller-financing-impact-of-the-safe-act-and-the-dodd-frank-act – 2012-01-12

Sales Clinic: Expand Your Market with Seller Financing | Realtor Magazine

Are there any creative ways to sell a home that will maximize the salesperson’s value? —Timothy Baker, RE/MAX Affiliates, Naperville, Illinois If you want to be a top salesperson, you always have to be on the lookout for new and creative ideas to set yourself apart from the pack.
realtormag.realtor.org/…/feature/article/1999/12/sales-clinic-expand-your-market-seller-financing – 1999-12-01

Ways to Protect Yourself Under Seller Financing | Realtor Magazine

TIP: Instead of taking back an installment loan, per se, have the buyer purchase an annuity or some zero-coupon bonds in your name. These can often be bought at deep discounts to eventual payout, lowering the sale price, but guaranteeing you a higher future return.
realtormag.realtor.org/…/sell-your-business/article/ways-protect-yourself-under-seller-financing

NAR Submits Comments on CFPB’s Proposed Seller Financing Rules

On Oct. 15, 2012, NAR President submitted comments to the CFPB on its loan originator proposed rule. On Oct. 15, 2012, NAR President submitted comments to the CFPB on its loan originator proposed rule.
www.realtor.org/articles/nar-submits-comments-on-cfpbs-proposed-seller-financing-rules – 2012-10-19

Sellers Can Fill a Void | Realtor Magazine

If you’re working with sellers who have seen offers collapse because buyers can’t get a mortgage loan, you might want to suggest they consider offering some variation of seller financing.
realtormag.realtor.org/law-and-ethics/law/article/2011/07/sellers-can-fill-void – 2011-07-01

Seller Financing: The SAFE Act

In 2008, President Bush signed the Secure and Fair Enforcement of Mortgage Licensing Act or SAFE Act, which requires licensing and registration of loan originators.
www.realtor.org/topics/seller-financing/the-safe-act – 2012-03-15
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Looking for something else? Search the archive for many resources created before 2009.

 

Field Guide to Lease-Option Purchases

(Updated April 2016)

Lease-option agreements* are common when acquiring personal property—such as dishwashers, washing machines, automobiles, and TVs—but are not as common for the acquisition of real property. Lease-option agreements are generally utilized in residential real estate acquisition when a home buyer would like to purchase a home, but needs to repair her credit rating in order to secure a promissory note and mortgage. The lease-option agreement allows a buyer to lease a property for a set period of time—typically between 1-3 years—with the option to buy the property at a contractual future date. “The negotiated option is typically a percentage of the price for example, one to five percent, and is credited, along with the rents and a rent premium, to the purchase price if the lessee buys the property. If the option to buy is not exercised, the buyer will lose the option fee and rent premium.” (Real Estate Law (link is external), p. 227). Read the articles below to learn more about this alternative real estate financing option. (H. Hester, Information and Digitization Specialist)

*Also known as lease-to-own, rent-to-own, lease/purchase, lease with an option to purchase, or real options.


E – EBSCO articles available for NAR members only. Password can be found on the EBSCO Access Information page.


Lease to Own: The Basics

Is rent-to-own the future of housing? (link is external), (HousingWire, Jan. 14, 2016).

Investors Bank on Rent-to-Own Comeback (REALTOR® Magazine, July 29, 2015).

How do Lease Purchase Agreements Work? (link is external) (SFGate, n.d.).

How Do I Get a List of Rent to Own Homes? (link is external) (realtor.com®, July 25, 2012).

How Do I Find A Rent To Own Home In Bristol, Pennsylvania? (link is external) (realtor.com®, May 10, 2012).

How Do I Find A Realtor To Explain The Rent To Own Option? (link is external) (realtor.com®, Apr. 6, 2012).

Lease-to-Own Contracts (link is external), (UCLA School of Law, 2012).

Lease options are back: proceed carefully (link is external), (Realty Times, Oct. 25, 2011).

Sale-Leaseback Transactions: Price Premiums and Market Efficiency (link is external), (Journal of Real Estate Research, Apr.-June 2010). E

Informal Homeownership in the United States and the Law (link is external), see page 132. (University of Texas School of Law, 2010).

How lease-options benefit sellers, buyers … and their REALTORS®? (link is external), (CRE Online, n.d.).

Thought about lease-to-own transactions?, (REALTOR® Magazine – Speaking of Real Estate blog, Aug. 6, 2009).

Renting to Own (link is external), (realtor.com®, n.d.)

Case Studies & Examples

A Valuation Framework for Rent-to-Own Housing Contracts (link is external), (The Appraisal Journal, Summer 2014). E

Lease-to-own deals offer options in sluggish Tampa Bay housing market (link is external), (St. Petersburg Times, Oct. 23, 2011).

Can I get a lease option with bad credit? (link is external), (realtor.com®, May 5, 2011).

A Growing Housing Imbalance (link is external), (Mortgage Banking, Oct. 2011). E

Raising Capital Through Sale-Leasebacks (link is external), (Public Management, June 2010). E

Tax Implications

Individual Taxation Developments (link is external), (The Tax Adviser, Mar. 2012). E

Comparing Accounting and Taxation for Leases: Certified Public Accountant (link is external), (The CPA Journal, Apr. 2009). E

Tax Considerations for Buying and Selling Property with a Burdensome Lease (link is external), (Journal of Accountancy, 2009). E

Government Publications & Programs

State Agency Lease/Purchase Program (link is external), (Washington State Treasurer’s Office, n.d.).

Recent State Agency Lease/Purchase Interest Rates – Real Estate Only (link is external) (Washington State Treasurer’s Office, n.d.).

Definition from Washington State:

Lease/Purchase Obligations (Real Estate) — Lease/purchase obligations are contracts entered into by the state which provide for the use and purchase of real or personal property, and provide for payment by the state over a term of more than one year. For reference, see RCW chapter 39.94 “Financing Contracts.” Lease/purchase obligations are one type of lease-development alternative.” (Financial Budget Instructions Glossary of Terms (link is external), Washington State Office of Financial Management, n.d.).

Non-Mortgage Alternatives to RE Financing (link is external) from Reference Book – A Real Estate Guide (link is external), (California Department of Real Estate, 2010).

LFC Hearing Brief (link is external), (New Mexico Legislative Finance Committee, Dec. 2007).

Instructions for the Lease/Purchase Analysis Modeling Tool (link is external), (Idaho State Leasing Dept. of Administration, n.d.).

eBooks & Other Resources

The following eBooks and digital audiobooks are available to NAR members:

eBooks.realtor.org

Smart Guide to Real Estate: Step by Step Rent to Own, (Kindle and ePub)

Investing in Rent-to-Own Property, 2010 (ePub)

Investing in Real Estate With Lease Options and “Subject to” Deals, 2005 (ePub)

Books, Videos, Research Reports & More

The resources below are available for loan through Information Services. Up to three books, tapes, CDs and/or DVDs can be borrowed for 30 days from the Library for a nominal fee of $10. Call Information Services at 800-874-6500 for assistance.

Who Says You Can’t Buy a Home! (link is external) HG 2040.5 R25w (2006).

Field Guides & More

These field guides and other resources in the Virtual Library may also be of interest:

Sale-Leasebacks & Synthetic Leases

Seller Financing

Information Services Blog

Have an Idea for a New Field Guide?

Send us your suggestions (link sends e-mail).

The inclusion of links on this field guide does not imply endorsement by the National Association of REALTORS®. NAR makes no representations about whether the content of any external sites which may be linked in this field guide complies with state or federal laws or regulations or with applicable NAR policies. These links are provided for your convenience only and you rely on them at your own risk.

How to Get a Shared Appreciation Mortgage

download mortgbankmag-sams.pdf

The shared appreciation mortgage (SAM) is an arrangement between the borrower and lender that gives the lender or another party a percentage of the home’s future appreciation. SAMs are sometimes used between relatives or other investors when the buyer does not have a sufficient credit history or down payment.

Instructions

  • STEP 1: Contact the local bar association for recommendations on real estate lawyers who have done shared appreciation mortgages. Ask referred lawyers how many SAMs they have done. Because of the rarity of SAMs and their potential repercussions, getting an experienced lawyer is extremely important.
  • STEP 2: Contact lenders in your area about SAMs and check what experience they have with SAMs. Choose a lender experience with SAMs.
  • STEP 3: Ask your chosen lender what the time frame will be on the appreciation period.
  • STEP 4: Ask the lender what percentage of the home’s appreciation it seeks.
  • STEP 5: Establish how the appreciation will be determined – through an appraisal or sale? In either case, if you (the borrower) do not have the appreciation money to pay the lender at the time it is due, the lender may force a sale.
  • STEP 6: Ask the lender what happens if the house does not appreciate in value or depreciates. Make sure the repercussions of a decrease in the value of the house are spelled out.
  • STEP 7: Ask the lawyer if the lender’s terms are standard and what terms are reasonable for the type of SAM you are considering. This is where your lawyer’s experience in doing SAMs will be extremely helpful.

Tips & Warnings

  • Most lenders on a SAM want from 30 to 50 percent of the appreciation. Be sure to set the figure in the contract.
  • The lender in a SAM – whether it be an institution or an individual – reduces the interest rate on the mortgage in return for sharing in the appreciation. Spell out how much lower that rate will be and for how long.
  • Be sure to have the appreciation period spelled out. While your payments may be based over a 30-year period, most lenders in a SAM want the appreciation period to be much shorter.
  • Even if your SAM lender is a member of your family, get your own attorney to help and advise you on negotiating the terms of the SAM.
  • If property values are falling, SAMs may not be available.

Shared Appreciation Mortgages Re-Debut

If you’re in the market for a mortgage this fall, you may begin seeing ads for “Fixed Rate Mortgages at 6%!” It’s a “new” old mortgage concept: the Shared Appreciation Mortgage, or SAM.

The SAM was introduced in the early 1980’s, when interest rates were high enough to make mortgage qualifying a real challenge. The idea was to give borrowers a lower interest rate — as much as 2% — in exchange for sharing the property’s increased future value with the lender. It promised both easier qualification and a monthly payment that was easier on the budget.

But the concept never caught on; adjustable rate mortgages (ARMs), with both a lower rate today and the potential for a lower rate tomorrow, proved more attractive than any fixed rate mortgage. The SAM, like other niche products, was shelved.

Now, however, mortgage rates are uncomfortably high again, and ARMs have lost much of their luster, with first-year rates not far enough below FRM rates to attract many borrowers.

How Does the SAM Work?

The SAM is a fixed rate, fixed term loan that can run up to 30 years. In exchange for a lower interest rate, you agree to give up a portion of the home’s future value — the difference between what it’s worth now and what it will be worth then.

The interest rate is reduced depending on how much of the property’s appreciation you bargain away. For example:

Standard 30 Year Fixed Rate Mortgage: 8.00%
SAM w/20% Appreciation given to investor: 7.50%
SAM w/30% Appreciation given to investor: 7.00%
SAM w/40% Appreciation given to investor: 6.50%
SAM w/50% Appreciation given to investor: 6.00%
(Note that the actual appreciation share/interest rate breaks may differ from this example.)

Any increase in the value of the home will be split with your mortgage lender if you refinance, move (paying off the loan in the process) or otherwise terminate the loan.

Say you buy a home valued at $100,000. After three years, you decide to move; your home has appreciated by $9,273. In a 50% revenue-sharing arrangement, you’d owe the lender half that — $4,637 — plus, of course, the remaining unpaid balance of your loan.

Breaking Even

This example assumes that you reduced your mortgage rate by 2 percent. Let’s look at how the SAM compares with a traditional FRM.

Traditional:

8%, $80,000 30-year fixed rate
Monthly payment: $587/mo
Interest paid after 36 payments: $18,957
Remaining balance: $77,824

SAM:

6%, $80,000 30-year fixed rate
Monthly payment: $479/mo
Interest paid after 36 payments: $14,134
Remaining balance: $76,867

The difference comes to $3,867 in interest payments after 36 months. Add the additional equity saved due to the lower interest rate ($957), and you’re ahead $4,824 in three years.

Out of that, however, you owe $4,637 to the lender (equal to 50% of the appreciation). Your savings dwindle to $187 in three years.

SAM and Prepayment Penalties

It might be tempting to take a SAM for a while and then refinance to avoid sharing the appreciation, but SAMs have a sort of prepayment penalty to keep you from doing so. Typically, if you prepay more than 20% of the outstanding balance during the first 3 years of the loan, you’ll be penalized the lesser of

a) 2% of the amount of my prepayment which is greater than the 20% level, or

b) six months stated interest which would be charged on amount of my prepayment which is greater than the 20% level, or

c) the maximum allowable penalty by law (which varies by state).

It’s actually an anti-refinancing clause, since the fee is based on how much above the 20% you send. If you were to send 21%, for example, your fee would be based on that 1% overage, which wouldn’t be much. Send in all $80,000 by refinancing, though, and it begins to bite: you could owe $1600 (2% of $80,000) or a charge of as much as $2,400 (approximately six month’s stated interest) –perhaps more, if state law allows.

Selling your home doesn’t trigger this clause; you’d owe only the principal balance, plus the percentage of the appreciation you agreed to share.

Appreciation Defined

Since appreciation is at the heart of this mortgage, it’s important to know how the term is defined.

Virtually all improvements or upgrades you make to the home will count as appreciation; so will the appreciation which results from market conditions. If you add an attic dormer or finish the basement, for example, you’ll be liable for the agreed-upon share of the increase in value.

Should you give away up to 50% of the increase — adding as much as 50% to the cost of your project? You don’t necessarily have to, if you follow the rules of the SAM closely.

The SAM’s loan documents state that a “Qualified Major Home Improvement” (QMHI) can be excluded from the calculation. A QMHI is one which increases the living area of the home; any “substantial” kitchen and bath modernizations; new decks, porches, patios, garages; and paving an unpaved driveway. In addition, the total cost of the project needs to exceed $10,000 or 6% of the original value (or adjusted value) of the home, and it must be completed within six months after you’ve started it.

Items the lender deems as “ordinary maintenance,” however, may not qualify as a QMHI. The list typically includes repair (or replacement) of roofs, ceilings, walls, floors, foundations, heating and/or air conditioning systems, electrical and plumbing systems, windows, doors, landscaping, pools, sheds and even paint and wallpaper. They may be counted as part of a larger improvement, however.

A QMHI can cause an increase in the home’s value to which the lender isn’t specifically entitled. To avoid this, you can ask the lender to adjust the home’s “basis” value by having it appraised before and after the project. It’s your responsibility; failure to do before the project begins will mean no change to the basis value. If that happens, you’ll be liable for the entire amount of appreciation. In other words, you’re giving compounded money away later by not paying for an appraisal today.

In theory, if you added a level and improved the value of the home by $15,000, the appraisal beforehand should have showed your value at $100,000 before and $115,000 after. The lender would not receive any share of that increase, since the new basis value of your home would rise to $115,000.

Creeping Appreciation

At first glance, it appears as though the rules for measuring appreciation seemingly contradict themselves by excluding “ordinary maintenance.” In reality, though, the lender benefits as you gradually improve the home. For example, gradually adding $3,000 worth of improvements to your $100,000 home over several years — that is, not as part of a QMHI — will be judged “ordinary maintenance,” and will let the lender share in the added appreciation which results.

It’s easy to see how the dollars add up with “maintenance” items. Before you install hardwood floors or new windows, you might consider combining several such improvements until they qualify as a QMHI. (Remember, they have to meet a certain dollar threshold and be completed within six months). We suggest you contact the lender beforehand to see if any improvements might be considered a QMHI if they are included in a substantial modernization or “expansion of living area” project.

The End of the SAM

If you keep the SAM for the full 30-year term (lesser if you’ve been prepaying), you may need cash to pay for the lender’s appreciation share. Assuming an average of 2.5% price inflation, your $100,000 home will be worth a whopping $204,640 after 30 years. In a 50% appreciation-sharing arrangement, you’ll need to come up with $52,320 in cash after your last payment. One way is to invest most, if not all, of your interest savings over that time. An $80,000 30-year fixed rate mortgage at 8% would have cost about $131,324 in interest over 30 years. With a 6% SAM, you’d save $38,654 in interest, leaving a shortfall of $13,666 (not counting any interest from investing it).

If you’re not selling your home when the SAM ends, you’ll need to come up with the money, whether from savings or a home equity loan. If you’re facing retirement — and the prospects of living on a more fixed income — at that time, you might be dismayed at the prospects of another starting a new mortgage. The contract states that what you owe is due and payable, with no extensions.

Be aware, also, that the full loan amount, plus any appreciation, may become immediately due if you don’t live in the home for at least a year.

Declining home values

If your home’s value declines during the SAM term, the lender doesn’t receive anything additional; you’re only liable for the mortgage amount. If the value declines too much, however, you may be left with no equity at all. Values today are at lofty levels, and a sharp decline could make it difficult even to repay the remaining mortgage amount.

Worse yet, the total cost of selling your home plus the mortgage payoff (and any penalties you might incur) could greatly exceed the amount for which the home can be sold. You could face a large out-of-pocket sales expense.

Is a SAM for you?

With the opportunity to qualify for a mortgage — or obtain a larger mortgage with the same income — a SAM could provide opportunities that more traditional mortgage arrangements can’t, such as buying a home without using all your available cash, or simply buying a larger home.

However, complicated mortgage loan structures aren’t for everybody, and a SAM may or may not be the product for you. A SAM might be in your future if you believe that home values in your area won’t rise or fall too much.

Wouldn’t a lot of appreciation be good? Not necessarily. First, you’re obliged to share the gains. Also, if property values have risen overall, you may need that cash to trade up to a larger home. On the other hand, if the value doesn’t change much, you’ll owe little if anything, but you’ll have enjoyed a cut-rate mortgage while you’re there.

A SAM might be used as a refinance product as a way to free up some cash each month for more pressing obligations, especially if you have little equity. Debt-consolidation refinances are common, but may tap out all the equity you’ve built. High Loan-to-Value refinances — in which you borrow 100% or more of the home’s value — usually come with higher interest rates, fees or both. A SAM, however, can give you a low rate and more available cash now, and defer the outlay until later. This is apparently the audience that the SAM is intended for.

A SAM may or may not be a product suited for the long term, either. The loan documents specifically note that “on a statistical basis, you should assume that the total interest cost of a SAM will be equal to or more than the total cost of a conventional mortgage.” With a traditional mortgage, those total costs are largely known. A SAM may end up costing more than you expected, or budgeted.

A SAM might also not be the best choice if you aren’t diligent about your finances, or if you wouldn’t want to bother with the needed appraisals to keep the basis value current. And it might not be the right product for a below-market property which needs a lot of TLC, but not a Qualified Major Home Improvement to shield your out-of-pocket investments. If a good cleaning, painting and simple maintenance will increase the value of the home measurably, you could end up spending at least some of your savings on regular appraisals, or face losing some of your “sweat equity”.

The SAM and Uncle Sam

Deducting mortgage interest is easy with a traditional mortgage; a SAM adds a serious layer of complexity, as noted (in capital letters) in the disclosures. It also states that “the application of federal income tax rules [as they apply] to a SAM is both uncertain and complicated, and the rules will affect each borrower differently.” In other words, you may need an accountant.

It’s messy for a number of reasons — the potential for changing the value basis, for example — but primarily due to annual statements that assume you’ve paid interest (for tax purposes) at a “competitive market rate” for a non-SAM mortgage. Why? Since you’re actually paying the lender interest (albeit on a deferred basis), you should be entitled to deduct a portion of the interest you’ve actually paid. Chalk it up to IRS regulations: they may deem that the “competitive market rate” rate determined by the lender was higher than it should be, and that you are deducting more interest than is warranted. There are other potential complicating factors, too, enough so that an entire legal page is devoted to the mess it could become. Suffice it to say that you’ll likely need professional help to do your annual returns.

If not SAM, then what?

Although there are no fixed rate mortgage products in the open market which can give you up to a 2% below market rate, there are be other alternatives to the SAM.

For a home purchase, you can investigate state Home Mortgage Finance Agency programs which may be available to you. Your states may lend you money at well below market rates if you meet certain income requirements, or are purchasing a home in a certain area.

Other options include a 2-1 buydown; it can lower the interest rate by about 2% below market for the first year, then 1% below market for the second year, ending up just a little above market rate for the remaining term. They’re easier to qualify for, and could be useful if you are fairly certain that your income will rise in years ahead.

And there are various Adjustable Rate Mortgages (ARMs), but you’ll need to scour the market for a decent break in the interest rate; at the time we wrote this, real deals in ARMs were few and far between.

An Interesting Scenario

So you chose a SAM (with a 50-50 appreciation split) over a 30-year FRM because it looked like the better deal. But you’re worried about coming up with the cash needed to give the lender his share.

Consider using the savings creatively. Instead of a monthly FRM payment of $1,468, you’re paying $1,199. Use that ‘extra’ $269 per month to prepay your loan. That way, instead of shelling out $328,310 in interest (FRM) or even $231,676 (non-prepaid SAM), you’d pay just $136,574 in total interest charges over the term of the loan. Not only that, you’ll reduce the SAM’s term from 30 years to less than 20 — and hopefully reduce the lender’s take as well.

Compared to the SAM with no prepayment, you’ve saved $95,102 in interest, which might be enough to cover what you’ll owe the lender at the time of payoff. And, compared to the 30 year fixed rate, you pocketed $191,735.

Call it the SAM Scheme.

This article was originally published in 2000. After making a very minor splash in the market, the Shared Appreciation Mortgage has vanished from mortgage menus again. At some point, we expect to see it return.

Copyright © 2006, HSH Associates. This article may be copied and distributed, providing that full source credit is left intact and a link to (or mention of) our Web site is included (in text form, if applicable).

HSH Associates, Financial Publishers
237 West Parkway
Pompton Plains NJ 07444
973-617-8700            |        800-873-2837

In the course of buying and selling real estate, partnerships are formed, alliances so to speak.

In the course of these partnerships , investors often obtain a mortgage in one persons name or the other.

We have all done this. My grandmother and my mother were property owner’s in Lee County. This is a means to and end. I know people in the club , who have a syndicate of 5 or so investors , who flip houses back and forth for different reasons, I.E. to get away from the hard money loan once the rehab is done.

If you are a new investor and you are approached to do this you should ask your self some questions:

1. Am I a partner or just the borrower, You have most of the risk , you should get some of the reward.
2. The person who wants me to do this, why cant they get a mortgage in there name?

If its due to too many properties in their name already , okay, I understand. If its due to the fact that, they do not like to pay there own personal bills and have bad credit then think about this, if they have so little regard for their own credit how much will the value yours?

Do they have bad credit due to something beyond their control?

If they have bad credit are they trying to fix it?

Ask to see their credit report and balance sheet.

Listen to this, in real estate there is a lot of money.

Where there is money , there is greed.

Do not rely on the fact that they show you a check or some piece of paper showing that they are successful.

Anyone with a scanner can do that.

I am not saying look for the monster under the bed every time, just be diligent and see who you are getting involved with.

3. what is my recourse and protection?

Is the property staying titled into my name or a land trust I have no control over?

Who sends the check to the bank?

If its the tenant , ask the investors from Alterative Home Financing how well that worked. Peter Kollar has spoken to a lady who went into a deal like this and now is getting foreclosure papers.

4. Does this person have the means to carry the payment? If the investor is robbing Peter to pay Paul, try not to become the next guy in the pyramid.

5. Numbers, numbers, numbers. These are the deal, not salesmanship.

A 95% loan on an investment property that is intended to be a flip makes no sense, unless the buy is strong. If the numbers are not there then run.


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Most Lenders consider 4 vital facts before giving you a residential mortgage: (click here for commercial mortgages)

(only the collateral is usually considered for a hard money mortgage, equity loan)

The four “C”s

  • Collateral. The value of the property you are borrowing against.

  • Credit. The way you have paid people in the past is considered a good indication of your willingness to pay money back in the future. 75% or more of loan originations involve the use of FICO credit scores.

  • Capacity. Do you have the income to pay this loan and still eat!

  • Commitment. How much of a cash down payment did you put down.

Why are these 4 things important?

Real estate collateral or Loan to Value ratio

Your mortgage will typically be a proportion of the value of the real estate. For example: the home has a market value of $100,000 and you want to borrow $80,000 as a first mortgage. This would be a Loan to Value ratio of 80%.

Let us assume for the moment that you are buying the house for full market value, that is $100,000. Where does the rest of the money come from, $20,000 plus the closing costs, pre-paids etc? It could come from your savings, it could come from a second mortgage, either a seller held second mortgage or another lender, it could come from a gift, perhaps from your parents. Or it could be a combination of these.

Lenders LIKE you to have your own money in the deal. If the other 20% is your money, this gives them a strong feeling of security.

How about if you are actually buying this $100,000 house for $70,000? Conventional lenders like banks will only lend you 80% of the market value or purchase price, whichever is LOWER. In this case they would lend you 80% of $70,000, or $56,000

Why is this? It makes the loan safer for them, they don’t really believe that you have got a great deal and they still want you to have your money in the deal.

But there are mortgage lenders, typically those that work with investors who will not be bound by a percentage of the purchase price. However they will usually lend you less than 80% of the appraisal value. These lenders are often called hard money lenders.

Why is the Loan to Value ratio important? Simple. If the lender has to foreclose on the loan because the borrower hasn’t paid, they will not only want to recover the principal outstanding, but also their legal fees and unpaid interest. Obviously this can only  happen if the house is worth more than the principal, legal fees and accrued interest. If they lent $100,000 against a home worth $100,000 this is not likely to be the case!

Credit

If you have a proven history of not paying other people on time, it is highly likely you won’t pay the lender on time. Let’s be blunt here. When someone has bad credit, what it really means is they just don’t pay their bills. Now there can be a good reason for this, and these are often taken into account. For example medical bills when someone has no health insurance. Or perhaps you went through a nasty divorce and your bank account was cleaned out. Maybe you started a business that failed and have now got a regular job.

But if there is a track record of car repossessions, credit card write-offs, unpaid utility bills etc. you come across as someone who is financially irresponsible. Unless the property is worth a lot more than the loan you want, you probably won’t get it.

Order your credit report on-line now.

Capacity

The lender wants to sure that you can afford to pay your mortgage and still pay your other bills. In fact, it is LAW in some states that lenders avoid residential loans that the borrower clearly can’t afford. They will consider your job history and your time on job. How much other debt do you have? Are you over extended? Conventional lenders use certain ratios to calculate your capacity to pay back the loan. A conventional lender is one like Bank of America, Wachovia, Wells Fargo Bank.

  • The mortgage debt ratio. This is the percentage of the new mortgage payment to your income. 28% is a typical maximum ratio on a conventional mortgage.

  • The total debt ratio. This is the percentage of your total monthly payments, including the new mortgage, to your income. 33% is a typical maximum ratio on a conventional mortgage.

Commitment

Commitment is usually shown by having your own money at risk. If you are buying a $100,000 home and put down an investment yourself of $20,000 you have made a big commitment and will not lightly walk away from your obligations. On the other hand, if you have none or little of your own money invested, you are much more likely to just shrug your shoulders if things get tough and walk away from your obligations.

Consistently, year after year, low down payment FHA mortgages loans have a higher default rate than conventional mortgage loans.

Free Hard Money Mortgage Qualifier Spreadsheet

 Your ALT-Text here Download our FREE Excel Spreadsheet to see how much of a HARD MONEY mortgage you qualify for, depending on your credit score, down payment etc. Note this spreadsheet is purely OUR opinion, it is not an offer to lend. Other lenders may be more or less conservative than the amounts shown here.

OR run the same hard money mortgage qualifier spreadsheet on-line here.

Maximum loan qualifier calculator for conventional or sub prime mortgage.

Post a FREE mortgage loan request on our site

You are invited to post a listing to borrow money secured by real estate on our site. Lenders will compete for your business.

Mortgage requests that don’t work on our site (or anywhere else for that matter)

We constantly see ads placed that look like this:

We have terrible credit and no money. Can someone please lend us money to buy a house, we really want one?”
OR
“I am a 25-year old student with bad credit and no money. I would like to borrow $6 million to buy a shopping center”.
OR
“Want 100% financing to buy apartment building. Zero down payment.”

PLEASE! Ads like this are just a waste of your time. You’re dreaming. Ask ANYONE in the street if they’d like to own a shopping center (or a hotel or an apartment building) if they didn’t have a dime of their own money at risk and it didn’t matter how bad their credit was. How many people do you think would refuse?

Would YOU lend your money to such an individual? Of course not. Because you know full well that the borrower has a high chance of default and you will end up losing money when you eventually go through the legal steps to re-possess on a probably trashed property.

If you have bad credit and no money the only ways to buy a home are to buy it for well below market price (and get a high interest hard money mortgage) or to get a lease option on a home.

Mortgage requests that do work

But let’s change them a little. Same facts as above but now the borrowers have found good deals.

“We have a house under contract. It has been independently appraised at $100,000 when fixed up. The tax assessment is $80,000. We have it under contract for $55,000. The appraisal states that it would cost $10,000 to fix it up. But we hope to reduce this as we will be doing much of the work ourselves. Our credit is not so good and we only have $2,000 to put down. We would like to borrow $65,000. We need $55,000 to close and have no objection to the other $10,000 being held in escrow pending inspection that the work has been done properly. We would need stage payments released. We are looking for a maximum loan period of 24 months as we intend to clean up our credit and then re-finance.”

“My uncle has owned a shopping center for the last 20 years. He owns it free and clear. He wants to cash out and retire as his health is not so good. The net income after expenses but before depreciation is $600,000 a year. This allows for a 5% vacancy factor and 10% for leasing expenses and professional management. He has offered it to me for $4 million. As I’m an inexperienced student I would keep the professional management in place. An appraisal would indicate a value of about $6 million.”

“We have been renting the same house for the last 8 years. The landlord wants to sell it as he is moving out of state. It is worth $100,000, which is the sales price. We are able to put $3,000 down, we will need a first mortgage of $70,000 as he has agreed to hold a second of $27,000. Our credit isn’t too good after an on the job accident that had me laid off for 4 months. But we have both held the same jobs for over 5 years now. This will be our only debt. We have paid-off our cars.”

“I’m looking for a commercial construction loan on a rehab property, with a cash-out option after the property is improved.

The property is a row house in a favorable suburb of Philadelphia. After-Repair Value is around $130,000, according to local realtors. I am purchasing the house for $66,000 plus a creative financing deal for the seller. It will cost about $13,000 to bring the house to top-notch condition — rehab items include porch repair, brick pointing, plumbing repair, new kitchen cabinets and a new heater.

I am asking for a loan of about 65% of the cash purchase price of the property, so I can begin repairs. Once the rehab is complete, I would like to convert to a short-term commercial equity loan at 75% of appraised value, to get my cash back out while I sell the house.

Here’s the challenge:

My business is brand new, and this is my first property, so the company has no credit history. My own credit was fine until 2001, when my employer went belly-up and I remained unemployed for 2 years, and grossly underemployed (worked at Radio Shack) for another 2 years. My credit score is now around 580, ENTIRELY due to events related to my unemployment. I have no employment other than my business. So, I’m a high risk for a lender.

In exchange for accepting the risk, I am willing to pay above-market rates, some points up front, and give the lender first position on all loans. The loans will be fully secured by the property itself. Plus, I’m going to pay my debts; I’m a good credit risk with some recent hard luck.

Please call ONLY if you are willing to shoulder the bad credit.

Thanks for your interest.”

The above loan requests will produce loan offers. If you have little money, bad credit and are paying just about full retail price for a house, the only way you are likely to get financing is with: a lease option, seller financing or some government sponsored schemes.

How to write an effective listing.

Place a listing for money you wish to borrow. 

We recommend that you are proactive in your search for the money you need. After placing your ad, find it and use the “Email this ad to a friend”  button to send your listing to possible lenders you will find on our list of lenders.

Look for lenders.

Definitions

LTV means Loan to Value. If your property is worth $100,000 and you want to borrow $60,000 your LTV is 60%.

Excellent credit means no late pays in last 12 months. No foreclosures or bankruptcy last 7 years.

Few blemishes means few late pays in last 12 months. Foreclosure or bankruptcy over 4 years ago.

Poor credit means many late pays. Foreclosure or bankruptcy within last 4 years.

Terrible credit means currently in foreclosure, discharged from bankruptcy within last year.

View and print HUD document “Your Settlement Costs” here

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Discounted mortgage for investment

What is a discounted mortgage?

A discounted mortgage means you can buy the existing mortgage at a discount, that is to say, for less than the principal balance owing.  Thus you might be able to buy a mortgage with a current principal balance of $40,000 for $35,000.

If you can find an investor who is willing to pay you $37,000 for this mortgage, the $2,000 difference is your profit.

An existing mortgage is a mortgage that someone else is already receiving payments on. Nothing changes for the borrower if you buy this mortgage. They simply send their payment to you instead of the original lender.

What is a mortgage?

Although a mortgage is commonly used to describe a loan that is secured by real estate, a  mortgage is really the security instrument or document. The promise to pay is a separate document, called a promissory note or simply a note.

The mortgage (or Deed of Trust in some states) is almost always recorded in the County Courthouse. The mortgage is signed by the borrowers in front of a notary and must be witnessed, usually by two witnesses. It bears a Notary Seal.

The note is the shorter document. It is not usually recorded although it can be recorded. The promissory note is not usually witnessed but must be signed by the borrowers.

Follow through the course using the links below or jump around if you prefer.

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Learn what is meant by owner financing

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Wrap around mortgages – Seller Financing

October 13th, 2006 · No Comments

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Wrap around mortgages

A wrap around mortgage is in some ways similar to a second mortgage. It is inferior in priority to the first mortgage. (If you do not know what that means, click here.)

Here’s how it works and why you would use it.

Let’s say you own a home worth $100,000 and there is an assumable first mortgage on it in the amount of $60,000. The interest rate is 7% per annum. It was a 360 month (30 year) mortgage. The payments are $539.30 per month. There are 180 payments left.

You sell the house and are willing to take back financing from a borrower who gives you a $10,000 down payment.

You could take back a second mortgage of $30,000 at say 10% per annum for 180 months. You would get $322.38 a month. (If you do not understand how to calculate the payments click here).

But instead you could create a mortgage that “wraps around” the first mortgage for $90,000 at 10% per annum for 180 months. The payments on this mortgage are $967.14. 

In this scenario, you continue to make the first mortgage payments. You now get to keep $967.14 – $539.30 = $427.84 instead of $322.38.

This happens because you are profiting on the interest rate spread between the 7% you are paying and the 10% that your buyer is paying.

Why would a buyer agree to this? Perhaps interest rates have gone up in the meantime so they couldn’t get financing at a better rate. And remember, you have far more leverage on the buyer if you are holding financing.

Apart from the profit on the interest rate spread, there is another benefit to you. You know immediately if the buyer is not making his payments. Because you are getting them, not the lender, who may take months before they let ou know. In fact the first time you know is when you are served with foreclosure papers.

There is a disadvantage to the buyer. Apart from the interest rate spread, they are taking a risk that you may get their payment and not make the first mortgage payment. Thus they end up in foreclosure even though they have always paid.

Can you make the term of the wrap around mortgage different from the term remaining on the mortgage? Yes. 

But if you make the term on the wrap mortgage shorter, you could be in a position when your mortgage is paid off and you still owe money on the first mortgage. You will have to pay this first mortgage off in full as the buyer has paid off their mortgage with you.

How about if you make it longer. Also OK, You could have a $90,000 wrap mortgage at 10% per annum for 240 months. The payments would be $858.52. For the first 180 months you would get to keep $858.52 – $539.30 = $329.22. But for the last 60 months the first mortgage is paid off in full and you keep the whole $852.52.

As always, consult a competent, local professional for advice.

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Complete list of Mortgage and Real Estate courses Send page to friend Site Index
Mortgage and Real Estate Calculators Real estate and mortgage Resources Real Estate and Mortgage terms FREE Downloads
Current and historic interest rates Real Estate and Mortgage Forms FREE content for your web site Bookstore
Newsletter About Us & Privacy Policy Contact us
Bookmark this site. Internet Explorer users Click here  NetScape press CTRL-D. AOL users click the Heart. Mortgage-investments.com is our US Federally registered service mark no. 2,647,595

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Mortgages, owner financing, deeds of trusts, discounted mortgages, seller financed mortgage, hard money mortgage

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Mortgage Broker – The matchmaker between a homebuyer and a lender with the goal of them originating a mortgage loan. The broker draws from a pool of various lenders to find the right match.

Notes:

Do not confuse a mortgage broker with a mortgage banker. A mortgage broker brings together both the parties of a loan but does not actually originate or service the loan, while a mortgage banker originates and services the loan.See also: Conventional Mortgage, Fannie Mae, Ginnie Mae, Loan, Mortgage, Mortgage Banker, Origination Sources=Sources | 131072
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Copyright © 2006 Farlex, Inc.Source URL: http://financial-dictionary.thefreedictionary.com/Mortgage+Broker

Mortgage – A loan secured by the collateral of some specified real estate property that the borrower is obliged to pay back with predetermined set of payments.

Notes:

The difference between mortgage rates and GIC rates is the profit that the bank makes. If mortgage rates are at 8% and GICs are paying 5% the bank makes 3%.See also: Adjustable Rate Mortgage (ARM), Conforming Loan, Conventional Mortgage, Fannie Mae, Fixed Interest Rate(mortgage), GIC, House Poor, Hypothecation, Lien, Loan, Mortgage Broker, Partial Release, Variable Interest Rate(mortgage) Sources=Sources | 131072
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Copyright © 2006 Farlex, Inc.Source URL: http://financial-dictionary.thefreedictionary.com/Mortgage