Why Hard Money Loans Rarely CloseDaniel Dobbs2023-05-25T20:25:18-07:00
Have buyers who can’t qualify because of credit issues?
Note: I very rarely post “uncomplimentary” articles about the business practice of other lenders, but agents should know if your client needs hard $$ to COE you should both know the process.
If you are one of my hard $$ readers, feel free to reach out and add to my knowledge of your type of lending.
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Two or three times a month, I get requests for “hard money” (aka “Alt Doc/ Sub Prime”) loans from buyers. Most inquiries are last-minute, desperate, as contingency deadlines are expiring and it’s evident Conventional / FHA financing is not the answer.
Hard money is perceived to be the last “Hail Mary” to save the deal. The bad news is even when buyers have hard money options, rarely do they choose to proceed to close escrow.
For those who do proceed, many obstacles present themselves, and very few hard money loans actually close escrow. In the meantime, the agent is left twisting in the wind as both buyer and seller frustrations begins to boil!
Here’s why:
1) There is no computerized loan (DU”) process for quick approvals, most hard money lenders will not even give even a pre-approval letter that will give an approx. rate and term to the buyer.
if you have a seller that won’t list their home for sale until they have certainty about qualifying for a new home loan, an agent is stuck between a rock and a hard place”.
3) Hard $$ blenders have a high turnover with account executives. In the last year, I’ve funded two “alt doc loans” (bank statements) only to have other hard $$ lenders, repeatedly, call me over and over again, every time seemingly with a different A/E.
When I quiz them about what they can offer my clients; they are “long on sizzle and short on steak”. Most are just not very experienced in underwriting loans themselves.
That leads to A/Es making promises for rates and fees for their companies. that just aren’t available. Another deal killer.
Hence I very rarely take in hard $$ applications. (no letters please)
4) Most lenders /brokers get few requests for this type of lending and often haven’t cultivated deep relationships with hard $$ investors.
Brokers just send the buyer’s loan app to another (hard) money broker, who in turn sends it somewhere else, dragging out the process, adding fees, and “time-killing” the deal.
5) Buyers themselves desperately themselves apply “all over town”
The buyer’s credit report now shows an obvious paper trail of “credit inquiries“, their scores go down (3-5 pts). Most hard $$ buyers are usually a little low on their Ficos, so these multiple inquiries just bury them further.
Because there are so many inquiries (and no MLO wants to be “a backup lender” any more than you want to be “a backup real estate agent”) the end result is few MLOs will really “drop everything” and commit to working the loan because only loans with the best chances of closing take first priority.
6) Lie, lie, lie some more, as buyers are turned down for conventional financing, they become desperate, and their “misrepresentations and obfuscations” increase and further drag out the COE. Drama Drama Drama. Exhausting.
Simply put: Once clients (in their highly charged emotional state) start lying they continue AND they get better at it!!!!!!!!!! That’s when the fraud sets in.
Desperate buyers do desperate things! Subsequently, they drag the agent (unknowingly) into their scheme. The best agent defense is an experienced MLO, with open lines of communication (who will tip you off).
Most lenders will simply “ghost” the agent, as they don’t want to be sucked into the drama or any legal issues. All the while this is going on, agents get sucked into this drama and pay an emotional price – when they could be working with viable clients!
6) Rates and Fees = Buyer Payment Shock
With Fannie and Freddie pricing (May12, 2022) nearing a 5% (30 yr. loan) rate, hard $$ loans are now ranging from 9.9% to 11.9% with 2-4 points, and higher fees vs. conventional financing.
7) Terms
Typically its 2-5 yr. fixed, “Interest Only”, with 1-2 year “pre-pay” penalty
8) Down payment
30-40% down, if it’s a “fixer” home more may be required to cover repairs.
9) “Alt Doc” Bank Statement Loans (12-24 months)
These are fundable, see a post that further describes bank statement loans.
10) Here are the “Typically” Underwriting Guidelines for Hard $$
Typically, the down payment is 30-40% and buyers must have 6 months’ “reserves” for all properties and 700 minimum Fico scores.
These criteria eliminate 90% of the buyers. Also, the down payment money must come from a personal account, “business funds” can’t be used for a down payment.
Usually, business owners / self-employed buyers become reluctant to withdraw a large sum of “operating cash” to get a home.
The last heart breaker is revealed only during the final underwriting step – which is a “QC check” (quality control).
Hard money/Alt Doc loans are “high-cost loans” and can only be used to purchase or refi INVESTMENT PROPERTIES., not a primary residence.
If a buyer is trying to purchase a “primary residence” with a hard $$ loan – and have no other property, hard money lenders will be forced to decline the deal (but only at the very very last moment – trust me on this, it happened on a deal I originated).
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