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   ARTICLE   |   From Scotsman Guide Residential Edition   |   September 2007

A Hybrid Approach to Hard Money

Pair private money with institutionalized hard money for a winning combination

The days of 100-percent, stated-income/stated-asset, 600-credit-score loans are behind us. After the nonprime fallout, it is once again important that borrowers actually qualify for credit and have the ability to repay loans. More-intensive underwriting is back to stay.

Where does a mortgage professional go to continue originating loans? In this environment of high delinquencies and foreclosures, one solution seems easy: To learn about and start offering hard-money loans.

It can be especially beneficial to find a “hybrid” lender that is part privately funded hard-money lender and part institutionalized hard-money lender. This kind of lender can offer financing to address the widening gap between Alt-A and nonprime prospects. Find the right partner to help you build bridges for your clients through their time of transition.

Comparing the two

It used to be that access to true equity-based loans was only available through private investors at rates in the high teens and points of 8 percent to 10 percent. Several companies have now institutionalized hard money, however. So, what’s the difference between a private hard-money lender and an institutionalized one?

A private-money lender can be especially flexible and creative. In addition, it can often offer more products, and it is generally faster than an institutionalized lender.

Drawbacks to these lenders are that they tend to be smaller and more fragmented. They often have a limited lending geography. In addition, they aren’t always current on regulatory guidelines.

Institutionalized lenders, on the other hand, cover a larger lending geography and are often up-to-date with regulatory guidelines. They also have a larger capital base with which to work.

A big disadvantage to these lenders is that they often have to fit most, if not all, solutions into one product. If a lender only offers one product, then it is less able to be flexible and creative.

The three focus areas

A good hard-money lender will typically look at three main focus areas when dealing with a hard-money loan — valuation, servicing (both lender and client) and the borrowers’ story.

Know which method of valuation your hard-money lender is using. Is it only considering loan to appraisal, or does it take the time to analyze the loan to value? The analysis the lender uses could have a significant effect on the viability of funding. Some hard-money lenders may base the value of your clients’ real estate incorrectly, which will undervalue your clients’ equity. Take the time to interview your hard-money lender to understand its criteria for valuation as well as its access to nontraditional solutions.

When it comes to client servicing, a reputable private-money lender will work with you and your clients to confirm the affordability and suitability of the recommended programs. Stay away from lenders that care more about the business of lending than whether the proposed financing is suitable for your clients.

Does your lender service its own debt? Those lenders that service debt do not have to conform to conventional lending standards. This allows them additional freedom and flexibility in servicing your clients’ needs. 

It is your responsibility to educate your hard-money lender about your borrowers’ story. What do they need? How long will the transition between loans be? What is the exit strategy? What product will help them meet their needs?

Many lenders only care about finding a way to get clients to fit into one of their product offerings and not necessarily about what is best for the borrowers. Stay away from lenders that don’t take the time or care to understand the story behind the funding.

Picking the right lender

It’s important to strategically align yourself with a hybrid hard-money lender that offers a plethora of options, not just mainstream products. Not all borrowers are equal. Therefore, it’s not prudent to push only one specific product for your borrowers. They should not be placed into a one-size-fits-all solution.

The best hard-money lenders understand the relationship brokers have with their clients. Thus, they recognize your need to provide borrowers with a solution during the period of transition from nonprime to Alt-A.

Ultimately, you should align yourself with a hybrid lender that not only cares about what you and your clients want to accomplish, but that also cares about its relationship with you. This mutually beneficial relationship allows you to provide additional value to your clients; you can arrange financing to get the clients’ credit fixed and to get them moving forward through their current financial hardship.

The preeminent hard-money lenders are flexible, creative and efficient. They offer several solutions to you and your clients.

•  •  •

Hybrid private lenders are not out to please Wall Street and can therefore be more responsive and creative. These lenders offer a range of products, including ARMs, home equity lines of credit and short-term bridge financing. In other words, they can structure a product to meet your clients’ needs.

When you take the time to find the right private lender, you will discover that you have access to the many programs necessary to help your borrowers transition through what can sometimes be perceived as a financial minefield. In so doing, you just might move to a higher level of service in your clients’ eyes.



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