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Time to shop
After answering your preliminary questions, potential buyers should be prepared to make an educated decision about whether to move forward. When they decide to proceed with a distressed-property purchase, a new set of questions arises that must be addressed before you prequalify borrowers for a loan. Consider:
What's the property location?
What caused the property to become distressed?
What was the property's previous use?
What is the market value of similar properties in the area?
How many other similar properties are for sale in the area? Make sure to differentiate between distressed and nondistressed properties.
Are there any restrictions on the property?
What are the property's biggest issues? For example, are there roofing, electrical, plumbing, rodent or termite problems?
As borrowers search for the right property, financing should be a big part of their decisionmaking. As their mortgage broker, the best advice you can give them is to finance within their means. Overstretching their financial capabilities and being overextended in debt payments is a recipe for failure.
If borrowers take their financial commitments seriously, their ability to service their debt must be an ongoing concern. As they consider financial options, another important factor that will impact their purchase is the past few years' credit crunch. Not only has there been less liquidity, but tighter underwriting standards have made it more difficult to get a loan.
So what are their financing options? They may request an adjustable-rate mortgage, but be sure to advise them of the potential increase in payments if the loan's interest rate increases when it resets.
You also can help clients get a construction or rehab loan, depending on the costs of the improvements, and then transfer them into a permanent loan.
The Federal Housing Administration's 203(k) loan can be an option for those who qualify. Keep in mind that loan amounts for the 203(k) program range from $5,000 to $35,000, certain requirements must be met, and there are currently a limited number of lenders offering it. Visit sctsm.in/203koverview for more details about the program's requirements.
When helping potential borrowers, have them consider the worst-case scenario. Can they afford a higher rate? What if they can't sell the property in two or three years?
If their answers to these questions point to an ability to service the debt, then they likely will not encounter difficulties in the future. On the other hand, if borrowers decide to take a chance and today's low interest rates are all they can afford, or if the property value must increase significantly to create a profit, a precarious position already exists.
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Today's real estate market has enormous opportunities for those who purchase distressed properties wisely. Mortgage brokers and loan originators can tap that opportunity by working with potential investors. By helping prospects make smart choices before and during the lending process, you can increase their profitability and your own.
Manuel V. Sicre is chief financial officer for EMP Medical Services and Central Medical Equipment Rental in Miami.
He has more than 36 years of experience in the banking and lending industry. Sicre has worked as a financial consultant and is now employed in the medical-equipment industry. Reach him at (305) 281-1919 or email@example.com.
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