Financing question

I am curious as to everyones thoughts on the following, please… :help

Since getting into rehabbing, my brother who lives in another state, would also like to get involved. He has cash for repairs (approximately $30k liquid), but unfortunately, his credit score is in the low 500’s. He, like others in the world, had a rough patch, but is working his way back up.

My suggestion to him, and this where I am looking for input, was to offer the bank/mortgage company a way to guarantee his payments while doing the repairs and selling and/or renting the house he chooses, while this would help him to re-establish his credit. In this credit environment, I was trying to think of a way for this to work for him.

Let’s say he was able to purchase a property for $55K, with an ARV of $115,000, from an auction/foreclosure/short sale/etc., His payments because of his credit, would be somewhere around $700/month @10% plus RE taxes and PMI on a 30yr loan. He would offer to secure these payments for the first year by putting it into a savings account (established at whatever bank he chose) so that the bank is guaranteed the repayment during the first year. Add to this, I suggested that he also offer to pre-pay his first two-three payments in advance, with an account (again at the same bank) opened with auto-withdrawal for the payment and the guaranteed account as back-up for the bank. At the end of the year guarantee, if he hasn’t sold the property for whatever reason or he has decided to keep it as a rental, assuming all payments were made on time, the bank would release these guaranteed funds, and his credit would be nothing but the better for it, and he would have had established a relationship with the bank.

What do you think? Is this feasible or would it sway a decision in his favor considering his credit score?

With the stringent requirements of most HML’s nowadays (I understand their minimum FICO is now 625, which doesn’t help my brother), I don’t think this would be an option for him, not to mention the costs involved.

OK, let me know what you guys think! I’d especially would appreciate input from any mortgage brokers who think this is viable… thanks again!

You’re just about on track.

Hard money works in a couple different ways.

Non rehab loans:
Based upon the as-is value, NOT THE ARV. Typically around 65%. He would use his own funds for the rehab.

Rehab loans:
Based on ARV, % will vary from lender to lender (most lenders lend close to their own states)…typically 60-75%.
Rehab Funds have to be calculated as part of the transaction.
Points and normal loan fees are usually paid out of the loan at closing.
If there is room in the equity, 6 months of payments can be set a side in escrow as a payment reserve.
So if there is enough room in the deal he may have to put very little of his own money upfront at closing.

With his scores though you may find that a lender wants some initial investment from him though. That’s great that he has money to put into the deal.

Also, hard money rehab loans usually require some working capital or a flexible contractor. The rehab money, which is held in escrow, is not advanced out upfront. The lender will reimburse work that has been completed and inspected. Setting up several phases would work best.

Now you just need help finding the right lenders. :biggrin

More and more the HM lender is concerning themselves with the exit strategy and with scores in the 500s, your brother’s only option is to flip after rehab.

If he decided to use a HM lender for the purchase and rehab, he wouldn’t get any benefit for the transaction as most HM lenders don’t report the loan to the bureaus (unless a default should arise).

Depending on where your brother is investing, credit score might not be an issue at all.


Scott Miller

Thanks for the replies…

Specifically, what do you think of my suggestion to basically guarantee the loan for the first year for the bank? It’s alot better deal than most banks get when financing someone and I would think pretty attractive as they not only have RE as collateral but a years worth of payments locked in as a guarantee greatly reducing their risk, not to mention 2-3 months of payments in advance at closing. Will this strategy work when financing with a bank/mortgage company? I suggested setting this strategy up with a bank/mortgage company as the upfront costs and payments would be lower with a regular mortgage and this would also have the added benefit of helping his credit. By guaranteeing the payments for a year with cash in their bank where the mortgage is taken out, as well as, paying 2-3 months of payments in advance at closing, would this help seal the deal? If no, why?

Scott, on your website, it says regarding HM - “In which decisions are based upon the equity of the deal and not the credit, income or assets of the borrower.” So, worst case scenario, he could call you and use your company, assuming the deal made sense equity-wise, yes? Would there be any other hurdles?

Thanks again…

While well thought out, more than likely banks or mortgage comanies (which just go through banks/lenders) would not do this deal. Setting up a payment reserve is pretty typical in the rehab/construction process anyway.

But dont be discouraged. His local banks all probably have a slightly different lending philosophy. It would be worth opening up the yellow pages and selecting 10+ banks to call. You’ll want to speak to the commercial lending department. Simply ask them if they do short term investment rehab loans for those that have been credit challenged but have the ability to contribute a down payment and upfront payments. They’ll let you know immediately whether to pursue coming in to discuss further.

In all likely hood this a deal for a hard money rehab lender. You dont need a broker to work with local banks but you may find that working with a mortgage consultant specializing investment loans will held simplify your hard money experience.

Although it is quite possible to secure a hard money loan to get your brother in, the question for some lenders will be “how will he get out of it if he can’t flip/sell it”?

I’d have to know more about the deal to be certain, so I’ll leave it at “maybe”…


Scott Miller