Short Sales & Private Money / Hard Money Might Make a Good Financing Alternative
In Florida, one of the hot topics is Short Sales the purchases and the financing of these properties. However, before you jump on the band wagon and say "I would Never use that type of Financing" lets take a look of some of the advantage's Private Money / Hard Money can offer you in a purchase of a Short Sale.
When you are purchasing any type of property using Conventional Financing, (Fannie Mae, Freddie Mac) or Sub-Prime these Lenders will only use the purchase price or the appraised value which is ever is less when calculating your mortgage Loan-To-Value. Confused lets take a look below
Short Sale is for $150,000 and the appraised value is $230,000 sounds like a great deal and yes it is a great deal. In the eyes of conventional financing and the sub-prime world (yes Sub-Prime Lending is still alive and financing) the property value used will only be $150,000 where in the Private Money / Hard Money will use the true value of the property which in this case is $230,000.
So what does this really mean to me?
Conventional Financing Private Money / Hard Money
Purchase $150,000 Purchase $150,000 Value is $230,000
FULL-Documentation NO Documentation or very Little to be used
FICO Score (Credit Score) Loan is Not Based on your Credit Scores. However, to
take full advantage of the programs it may help
Mortgage Insurance (except in Sub-Prime) No Mortgage Insurance
Rate 7% est. 12% est.
100% Financing is Limited but still available Private Money your LTV 65% Financing
If you can qualify for a FULL-Documentation type loan please keep in mind going the conventional route maybe the best way for you to financial. However, many of my clients are self-employed and find it more difficult to go down this road and opt for the option of going stated or No Doc. Now some of these private money investor will NOT have a pre-payment penalty and some Conventional (Fannie Mae, Freddie Mac) will allow you to refinance the mortgage relatively soon after you close as long as you are not planning on taking the equity out of the property.
Now lets take a look at the same loan after a few months of paying on the Private Money Mortgage.
New Rate 6.375%
No M I
Loan is Stated and now based on the value of the property.
When choosing to seek Private Money / Hard Money type loan please keep in mind the following:
- Investors will only except their own appraisals. (Not the advice from your Realtor, Mortgage Broker or your own Appraiser)
- Be Prepared to pay points. Most of the Investors do not compensate the Broker and in addition will charge you a fee
- These type of Investors are built on Speed so you can close relatively fast which maybe a requirement of the Lender allowing the short sale to go through.
- 100% Financing maybe available in some cases however you will be required to pay the closing costs of the loan.
Where Do I Go to Get These Type of Loans?
Banks: The Majority of Banks Including: Bank of America, Chase, Suntrust, Wachovia, Wells Fargo,DO NOT offer this type of Financing
Direct Lenders:Some may have this ability but remember you must ask specifically for this type of financing
Mortgage Companies: Yes the Majority of Mortgage Companies do offer this type of Financing
Mortgage Brokers: Yes and please keep in mind of your friendly Mortgage Broker 
For More Mortgage Advice: Mortgage Advice in South Florida
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Hi Matt, great side by side comparision. I was a little lost though on the new loan scenario. I Can you expand on it?
Irina, Sorry about that. The new loan scenario can take place in a few months for the people with decent credit and has to go stated/stated. I hope this clear it up.
Matthew, it seems to me that if you have decent credit you won't need to go hard money. I think that hard money makes sense in many cases. What you appear to be overlooking here is the opportunity for the mortgage professional to work with the client to fix their credit and then refinance them at a later point. thgis is about building raving fans - not just customer service.
Kate, Please keep in mind I am speaking about high LTV's plus the ability to go either stated or No DOC. In addition when submitting to purchase a short sale in many case you must have the ability close extremely fast and in those case a pre-approval, DU approval will not be excepted by the Lender allowing the short sale. Not Every Hard Equity loan is based on poor credit. In the case of poor credit this does allow the person time to fix their credit while still being able to purchase a home. In my case I have both raving fans and I do offer great customer service.
Kate - that's not true... hard money is also fast... many times the banks will trade a better price for a shorter escrow... plus 90-100% financing may not be easy with conventional financing due to the title issues that can arise in a foreclosure situation.
Hard money gets past these issues, quickly... and can be easily refinanced 6-12 months later when the property has seasoned with the new owner....
it is a cost of doing business but given the savings that can come from a short sale/bank owned property, it is well worth it for most borrowers.
I have had clients with high 700 credit scores use hard money for such scenarios because it is EASY and cost effective.
First time homebuyers find this process extremely tricky as well because most banks will not do any work on a property and incur expenses therefore the property may not be FHA eligible....deferred maintenance could also throw off Fannie Mae underwriters in an appraisal review.
David, What can I write? You are SOOoooooooooooooooooo Right. Thanks for the comment
David, What can I write? You are SOOoooooooooooooooooo Right. Thanks for the comment
that was great! thanks for making it so easy to understand!
Bill & Barbara, My pleasure. Thanks for your comment
hey Matt,
Great post for showing how hard money lenders can be beneficial for the borrower, not just in the case of poor credit. Another way to put more buyers in the market who otherwise wouldn't be able to qualify for a loan.
Cheryl, Thank you I agree hard money is not just for poor credit anymore
Matthew- Thank you for sharing your knowledge about short sales as that is a very misunderstood and stigmatized product. You made a lot of clarifications that are useful in our business. I can see many situations wherein hard money would be the ideal choice even if you do have good credit. Katerina
Katerina, My pleasure. In this market it really is something we all need to keep learning (including myself)