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Because these loans pose much greater risk, they are offset by higher rates and shorter terms. The stated-income lender typically wants to see a lender-specific application, a 1003, a tri-merge credit report and a rent roll. Paying attention to Page 2 of the 1003 -- the assets page -- is the key to approvals on these loans. Make sure to load up the assets page with stocks, bonds, securities, inventory, equipment, personal property, etc. Your job is to make the underwriter comfortable with the borrower and with the deal. The assets page can go a long way to solidify or to kill your loan.
Few good SISA lenders exist in the United States, and of those, even fewer can be contacted directly by the borrower. This means that brokers can collect much higher fees on these loans and that borrowers have little ability to shop around. In general, these loans close in 30 to 45 days. Your fees should be in the two- to five-point range.
Hard money is the third major loan type. Rates can be in the double digits, and terms can last from one to three years. Over-collateralization is common. LTVs usually max out at 65 percent.
Funds for hard money come from private investors or groups of private investors. Two types of borrowers primarily use this type of financing -- borrowers with bad credit and institutional investors (or savvy entrepreneurs).
Borrowers with bad credit might have strong financials, strong assets and a great executive summary but simply can't get a bank loan because of low credit scores. Hard-money lenders do not require a minimum credit score to close a loan; they simply want a reasonable explanation for low credit scores. They also want to make sure a quick liquidation for profit is possible if a fire sale becomes necessary.
The second type of borrower, the institutional investor/savvy entrepreneur, is the borrower who finds an investment opportunity and who needs money fast. These borrowers don't care about rates, fees or terms. They are in it for the short term to make a quick profit. A $100,000 fee to a borrower making a $5 million profit seems irrelevant with such a high return on investment. Lenders usually want the borrower to provide them with a lender-specific application, an executive loan summary, all relevant financials and a market-opinion letter on the property value from at least two local Realtors.
There are a few simple questions to ask borrowers when prequalifying a hard-money loan: How much do you want? How much do you make? How much do you have in terms of cash and assets? And how do you plan to pay the money back? If borrowers do not have strong answers for all these questions, the deal will die.
Hard-money loans can close in seven to 14 days. At least five points for hard money is standard, but do not gouge. There are no predatory-lending laws in commercial lending, and as long as brokers do not overprice, there may never be any.
Christopher Perez is the director of Commercial Loan Consultants, a national commercial-loan-placement firm. He advises more than 700 residential brokers nationwide and provides a training program for residential brokers branching into commercial-loan origination. Contact him at (877) 473-6984, e-mail firstname.lastname@example.org or visit www.clcloans.net.
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