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   ARTICLE   |   From Scotsman Guide Residential Edition   |   August 2007

Hard Equity Shouldn’t Be Hard

Know how hard-equity lenders make their loan decisions for closing success

In a perfect world, all mortgages would have real estate collateral with the following traditional characteristics: single-family residence; owner-occupied; concrete-block construction; built less than 60 years ago; larger than 1,000 square feet; and an appraisal with nearby comparables.

Not all properties fit this ideal description, however.

For clients seeking financing for specialty properties with less-common characteristics, hard-equity loans may be the answer.

Conventional lenders examine the borrower and property carefully before they approve a loan. With hard-equity loans, however, lenders scrutinize the real estate more closely than they do the borrower.

Hard-equity lenders are willing to take chances on special situations, but they are still interested in reducing their risk on loans. Be prepared to give them details about all aspects of a property and why you are seeking a hard-equity loan.

The risk factor

Typically, hard-equity loan to values (LTVs) range from 50 percent to 70 percent. As the property type moves further away from the “ideal property,” hard-equity lenders often will modify their terms to reduce actual, potential and perceived risks.

They may reduce the LTV, for instance. This often is an effective way of reducing risk because more of the borrower’s money — rather than the lender’s — is at risk. Theoretically, this serves as an incentive for borrowers to not default on the loan. But if borrowers do default on a lower-LTV loan, they can sell the property for less money and still pay off the lender.

Alternatively, if lenders receive the property through foreclosure, the mortgage-payoff amount will be less if the initial LTV was lower. Again, lenders can sell the property for less and not have to discount the mortgage to dispose of the property.

Additionally, lenders may increase the interest rate and/or the lender points to compensate for the added risk. They also may reduce the mortgage maturity to provide for a quicker exit strategy.

Complete disclosure

When you present a package to a hard-equity lender, you must provide full disclosure. Explain why you are submitting it for a hard-equity loan. Do not make the lender guess.

Include a cover letter with the file that clearly explains and highlights the loan application’s positives and negatives. Hard-equity lenders do not like to be deceived or misinformed by dishonesty or omission. They will uncover any issues with the loan, so resolve the challenges from the start to avoid surprises later in the process.

Do not dance around a problem. Get a quick turndown if the lender clearly will not fund the loan. There is no sense in investing your time and having your client pay for an appraisal only to have the lender discover a problem and turn down the loan.

The decision

In the final analysis, hard-equity lenders will determine the loan amount based on their perception of the property’s marketability. The more marketable a property is, the higher the LTV can be.

In addition, the faster lenders think that they or the borrower could sell the property, the more they will be willing to lend. Therefore, a property’s curb appeal also weighs heavily in the underwriting decision.

To get the most favorable decision for your clients, it is important that you gain enough knowledge of the subject property. Learn any problems, issues or challenges it has. Acquaint yourself with its marketability factor. Prepare yourself and your client for a lender’s terms. Doing so will help increase your hard-equity closings.

 


 


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