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   ARTICLE   |   From Scotsman Guide Residential Edition   |   January 2015

Hard Money Lends a Hand

Follow these six steps to close more loans when the bank says “no”

Hard Money Lends a Hand

You have a great lead. Everything looks good and the deal is set to close, but at the last minute the bank says “no.” With today’s underwriting standards, banks are forced to turn down many transactions that they might have closed in the past. This could be because of issues with the property, the borrower’s credit, the ability-to-repay rule or any number of other issues.

In many cases, conventional lenders are focusing on straightforward mortgages and won’t extend their hands for transactions that are a little out of the box. Fortunately, your deal doesn’t have to die just because the bank denied funding. The transaction could be a fit for a non-traditional lender — aka a hard-money lender, private lender or bridge lender — someone who’s not afraid to put some skin in the game.

Nonconventional lenders are radically different than banks. Most are privately funded and therefore have greater latitude to structure a loan that works for the client. Hard-money lending is quite different than conventional lending. A hard-money lender focuses heavily on the loan collateral as opposed to the borrower’s credit score, financial stability, debt ratio, job status or other factors that impact that borrower’s ability to repay the loan.

As a result, mortgage professionals would be wise to adapt their business plans to successfully close more hard-money or nonconventional loans. Follow these six steps to increase the number of loans that you close through hard-money lenders and learn how to weed out loans that are duds.

1. Understand the transaction

This is the most critical step and the most frequently missed opportunity. Many mortgage professionals stop their review processes at the basic information on a property: address, loan-to-value (LTV) ratio, repayment schedule, etc. Unfortunately, this is not enough. You need to understand why the transaction can’t be funded conventionally and understand the borrower’s needs and goals.

For example, does your borrower have credit problems or insufficient income? Are there issues with the property or the neighborhood that might impact its value? Is the borrower looking to improve or reposition the property and then sell it? Does the borrower plan to actually live in the property? If so, that presents a slew of potential problems under current regulations.

It’s important to answer these questions early on because, in the hard-money arena, there are many different ways to accomplish a goal. For example, if a borrower provides all of the information on a property but doesn’t provide insight into why the loan is needed — that is, what the borrower is trying to accomplish — you need to get that info before you can make a decision.

If that same borrower already has a great low-interest loan, an investment property that could be pledged as collateral and simply needs a small amount of cash, then the best solution may not be to finance the new property. As a result of asking the right questions and understanding the borrower’s motivations, a hard-money lender can structure a transaction that meets the needs of a borrower at a comparatively low cost.

2. Qualify the deal

After understanding the borrower’s transaction, use the smell test to ensure the deal is not a time-waster. Look for warning signs that might indicate you’re not getting the whole picture. If you see smoke, it’s probably better to walk away from a deal early than to have it blow up in your face after you’ve put in a lot of work.

Let’s say, for instance, that you’re a lender being asked to finance a single-family investment property in Vermont, and the deal’s broker explains that the last six months were a little challenging for the investors but they are back on track now. A six-month track record is nowhere near a solid benchmark, so unfortunately this loan is most likely a total time sink for both the broker and the lender.

3. Identify the lender

Make sure you are working with a real lender and not just another broker. There are a couple of ways that a broker can check on a lender before sending out a deal. Perform an Internet search on the lender’s name and the words “lawsuit” and “complaint” to see what skeletons the lender might have in its closet.

Next, ask the lender to provide a property address on a recently funded transaction. If you take that information to the given county’s website, you should be able to find who placed a loan on the property to confirm that the lender you’re dealing with actually closed the loan. Finally, be aware of upfront fees and due diligence fees. There are unscrupulous brokers and lenders out there who charge large fees and have no intention of ever closing loans.

4. Find the best deal

Although you should selectively shop around a little to ensure that your client is getting the best deal, do not blast the transaction to many different lenders at once. Hard-money lenders that get e-mails from brokers who have sent the same message to 20 other lenders will often ignore the transaction altogether. If the deal is being shopped all over, there is probably more to the story than you’re being told, and the e-mail blast is a good indication that the transaction has some sort of issue.

When you are looking to find the best price, also make sure that you look at the total cost of the loan. Getting a loan is not like buying a car where the lowest price is the best price. For example, one lender might require extensive environmental paperwork, appraisals, and other items that take time and money, while another lender might close the loan with minimal red tape. During this process, remember to make sure that the loan still fits the goals of the borrower and that you are working with a reputable company.

5. Commit

Once you locate the lender and the transaction is moving along, make sure to get a hard commitment from the lender with all of the terms, fees, schedules and other pertinent items spelled out so that there are no surprises for you and your borrower at the closing table. Assuming everything looks good, take your borrower through the commitment step by step to confirm that the client is on board and has no questions or concerns that might disrupt the deal.

6. Execute and close

It is amazing how many deals fall through in the final step of the process. Once everyone is on board, it is important for the broker and the borrower to follow through to make sure everything is ready for closing. Check the loan documents, fees and terms, insurance forms, and every other piece of paper one last time to make sure that everything is in place and ready for the closing.

•  •  •

Any broker can close a vanilla, A-paper transaction. When the bank turns down a loan, successful mortgage professionals will use this as an opportunity to find alternative funding to get the deal done for their clients regardless of the challenges at hand. Closing the more challenging transactions helps you differentiate yourself from the competition and win long-term clients. 


 
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