Category Archives: Home Mortgage
What are Hard Money Loans?
For the purpose of financing your investment properties there are two options- Hard Money & Soft Money.
Soft Money- is simply money that is borrowed from banks and other lending institutions. This is the normal loan process where the loan is underwritten by an underwriter. There are rules and guidelines that are made by the lenders or by the groups that buy the loans from the lenders. This would include all loan types and verities.
Hard Money- is money from investors to fund your investment property. Hard Money is normally sort term. Hard Money is normally used when the property needs some repairs and rehab. With Hard Money you can finance the expense for repairs as a part of your loan. If you are able to locate a home with good equity you will be able to do the entire purchase and rehab with no money out of your pocket.
The Rules- since the money is coming from private investors they can make their own rules, unlike soft money above where the rules can be more restrictive. For this reason you can obtain money and eventually additional money based upon your track record and performance with a particular Hard Money Lender.
After Repair Value (ARV) – This is what the property would be worth after your rehab is competed and this value is normally determined by appraisers that work with your hard money lender. Normally Hard Money lenders will loan 65 of the ARV. This is how it works
if you buy a home for $100,000 you can borrow $65,000, 65 of that amount or $130,000, now you have money to buy the house for $100,000 and pay for your rehab.
Escrows- This is money that is held by a 3rd party, normally a Title Company, for a specific purpose. In the case of Hard Money Lending they would escrow your repair money and in some instances they would escrow your first couple of payments. This is done to ensure that the work on the property is actually completed. When you first apply for your Hard Money Loan for a specific property you would prepare a work sheet of what needs to be done and the cost of that work. This would be used to set up your escrow account.
Draws- The way the money for repairs is disbursed is by using draws. The Hard Money Lender would physically inspect the property to ensure the work was actually done and disburse the money accordingly. The money is not released all at once, rather in gradual portions as the work is completed. Each portion is a draw.
When & Why- There is a time a place to use Hard Money Loans. Normally for Soft Money to be used the property needs to have a roof, windows, doors, floor coverings. If the property does need some work this is called deferred maintenance. This would be noted by the appraiser when the appraisal is done. Traditionally if this number is over $2,000 you would not be able to receive a Soft Money Loan. The other reason investors use Hard Money Loans is so they do not need to use any of their money or to personally fund their project. As you can see a good portion of the properties an investor buys would be financed with a Hard Money Loan. This is due to the fact that most foreclosed properties are not well kept. However, there are always exceptions to this.
An 80 20 Mortgage – What Is Meant By This Term And Why Are They All That Are Available?
80 20 mortgages, and 75 25 mortgages are all that seem to be available these days. The reason for this is the policies of Fannie Mae and Freddie Mac have ruined the concept of creative financing. These agencies pushed way too many shady loans and because of this, they and the taxpayers and all future borrowers were burnt. So, we are left with the more traditional 80 20 mortgages. This is true even for people with great credit ratings. This article explains all about it.
A mortgage where 80% of the value of the property will be loaned to the buyer is known as an 80% 20% mortgage, or sometimes simply, an 80 20 mortgage. Throughout the years 2006 and 2007, the parameters of mortgages that were written were ridiculous. Some people were able to borrow more money than the property they were buying was worth. These people actually came out of their closings with their new homes and extra money in their pockets. Besides this, some people with extremely low credit ratings were able to buy homes without making any down payment!
The Wisdom of Bob Dylan
It has been said, people who rent don’t take as good care of their dwellings as people who own them. This makes sense because people who buy homes have a vested interest in making their property as valuable as possible. However, to quote Bob Dylan, “when you ain’t got nothin’, you got nothin’ to lose.” So obviously, when people were able to buy homes without using any of their money, these people became, essentially, renters. This is because they had nothing invested, so they had nothing to lose.
Irresponsible Lenders and Borrowers Have Hurt the Economy
When these people who had nothing to lose, were defaulting on their mortgages in great numbers, it became a problem for the economy. So the government, in its infinite wisdom, essentially gave more money to these people so they wouldn’t have to be foreclosed upon. This simply made matters worse because with this money there were no incentives attached for these people to try to make their properties more valuable and pay them off.
Putting Money Down Encourages Responsibility
Insisting borrowers pay 20% or 25% of the value of the properties they are buying erases Bob Dylan’s sentiments from the equation. These people who must take their hard-earned money to pay toward their homes now have incentive to take good care of them and to pay them off. Unlike people who bought homes with no money down, these people stand to lose $ 100,000 of their money if their houses become foreclosed properties. Therefore, it is logical they will do their best to avoid having their homes foreclosed. This is a good thing for the economy in general.
Some think it is cruel to revert to past policies which make it more difficult for first-time buyers to purchase their own homes. At first glance, it may look like these people have a point. However, how did people purchase their own properties throughout history and more pertinently, throughout the 40s, 50s, 60s, 70s, 80s, and most of the 90s? The answer is; people who want their own homes very badly will work hard and sacrifice to purchase them. These are the kind of responsible people who should own homes; not people who just plain don’t care.
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