If i’m looking into fix and flip properties will a conventional loan fund me or should i be using a HML i have about 70,000 in cash for repairs,down payment
also i’m in the nyc area so prices are high 300K and up also i will be doing multiple loans a year(if all goes as plan)
If you are looking to fix and flip then hard money is the way to go.
I’m just curious why you say that. Don’t think I really understand the advantages of using hard money for that. I always thought of it as a last resort to do if your credit is bad or if you can’t get any conventional financing due to the high cost.
I would think that if you found the right mortgage broker, you could do a slightly higher interest rate and get the broker to use the higher yield spread he would get to lower some of your closing costs. Then you’d just pay off the loan when you’re done flipping. Just make sure that there’s no prepayment penalty and that the broker doesn’t get hit if you pay off the loan too early. If you do, they sometimes have to forfeit some of the yield spread back to the bank.
As long as you pay off the loans and don’t have 3 or 4 loans outstanding at once, you should probably be able to do multiple loans in the same year. You could probably even have 3 or 4 at a time, but you’re going to be facing higher interest rates and your fico score will probably take a small hit with all those outstanding loans.
I still think that’s probably cheaper than hard money because you don’t have to pay all those points upfront and HML rates are higher than any rates you’d get from conventional loans. Plus it sounds like you have the cash to do the repairs so you don’t need the hml money to do the repairs which is what it would be good for.
I think the way I’d do it is use a seller concession of up to 3% to cover your closing costs, then use the cash for the down payment requirement for NOO, then after you close, you could float some repairs on a credit card, but then do a 2nd mortgage up to 90% LTV to free up some cash to do repairs. Not sure about seasoning requirements on the 2nd though, I don’t think there’s much of one. Add up your closing costs and compare to HML. Gut feeling tells me the closing costs are cheaper than paying 2-4 points upfront plus high rates.
Henry,
The reason I say that is because on conventional loans most companies have rules that state if the property sells before X number of payments are made then the yield has to be repaid to the lender. So if the broker raised the rate to use the yield to cover some of the closing expenses they would essentially be paying for the buyer to go to closing. So what happens is the buyer has to pay all of the hits to the discount rate that go along with investment properties. Things like non owner occupied, interest only, ect… This can equal big dollars with 1% origination and your discount hits you will be paying way more than the 3% that the seller can cover. Plus you are not going to get 100% NOO financing for a rehab property WITHOUT paying big money for it. Also, depending on the lender you may have a short term hard pre-pay on a second lien. So why not go with the hard money which is going to close much quicker, without having to bring any money to closing. However you did make some good points regarding this borrower in that he has his own money for rehab, and having cash for a decent down payment as well. So in this case conventional may be the way to go. However in most cases I would say go with hard money because it is much faster, much less documentation, and you have almost none of your own money tied into the transaction should their be any delays.
Go to a local bank in the area where the property is? Be sure to speak to the commercial lender and not retail.
They’ll set it up the same as a hard money lender but with better terms.
Hey Chris -
Are you saying that you or someone you know has been hit by a lender’s recapture for items like NOO, i/o, etc? For example:
7% is par rate
all hits add up to 1.5 basis pts
Broker increase rate to 8% to cover that 1.5%.
So ysp paid out is still $0 but the lender will come after the broker for anything above what the true par rate was?
Never experienced or heard of that happening.
Ok, I see where you’re coming from. I think in this case he’s good for a conventional loan. I just looked up a rate sheet and if he’s doing 300k for a single family, he can go up to 90% LTV for investment on a one or two unit property with an interest rate in the 7% range. I was going to say that maybe the rate could be jacked up higher, but a higher rate doesn’t really yield much extra yield spread so I guess it’s better to just pay the .5-1% origination fee.
Also while HML may be faster, I think you can do a prime type loan in about 3 weeks or maybe a little less if everyone moves quickly.
On the 3%, on 300k that works out to 9k which should be enough to cover standard closing costs, the suggestion there would be to close at the end of the month so you have less in pre-paid interest to add to your closing costs. Also I think if I was taking a risk with flipping, I’d go further and decline the owner’s policy on the title insurance. Now that’s what I’d do in Massachusetts where we do quit claims on a deed, not sure how deeds are set up in NY so this may not apply there. I think you also have to figure out the history of the property and how likely you are to need title insurance. I think in general the payout on it is very low, but there are some good horror stories about title insurance and if I were buying a house to live in long term, I’d probably buy it, but for the short time period of a flip and it’s high cost, it may be worth it to skip.
Anyway, I’m just against HML in general. They have their purpose, but it seems to me that if you need to use them, you’ll end up doing a lot of work and they will end up with a lot of the profits.
Ben,
Glad to have you back sir. I have not seen you post anything in awhile. No one that I know personally has ever had that happen to them where the yield was actually reclaimed. However just recently I did a refinance of a primary residence for a customer on a construction to perm loan. The loan closed in November, and in January the customer called just to verify what her loan amount was and the lender called our post closing department and spoke with the manager and stated that if she paid off her loan without making three payments that the yield would have to be repaid. She was only wanting to know her pay-off so she could make a large principle payment after her current home sold, but I was sweating it because it was a 700K refinance and I gave her some lender credit. Yield is yield whether it goes to the customer or the broker. The bank or lender is going to want their money. That is my understanding.
Henry,
The problem with going conventional in this scenario is that at 90% he will have to carry escrows as well as MI, and his out of pocket at closing will be higher due to having to fill his escrow account with 2-3 months taxes and insurance as well as a 12 month policy upfront. The MI factor will be high because of the LTV and the NOO status. However at least for this year MI is tax deductible. I will say this though I think you make a very good case for a conventional loan. I enjoy reading your postings because they are always well thought out and informative.
One option worthy of mentioning is marrying the features of a conventional loan with ARV based lending guidelines…
With a scores in the mid 600s, the OP could go with a conventional ARV based rehab loan that allows for 80 ARV with rates/fees considerably lower then hard money equiv.
Regards,
Scott Miller
Scott,
Can you elaborate on your comment? I have contacted 5 HML in CA in the last couple of weeks and without exception have indicated that their business practice has changed given the ‘real estate bubble’ and are only loaning 70-75 of purchase price with the same points and higher interest. Told them point blank that if I could make that kind of down that I don’t need them. Did I just find the wrong HMLs?
Thanks
Robert
There are two breeds of hard money rehab lenders; LTV based (as is condition) and ARV based (future market value)…it sounds like you might have speaking to the LTV crowd and not the ARV bunch…
Regards,
Scott Miller
any place to find these kinda banks that go by these guide lines?