When you are presented with that challenging loan scenario, turn to Finance Factors for guidance and assistance with your questions. This section discusses different loan scenarios and the possible solutions Finance Factors can provide to help create a workable loan.
- Determining CLTV for securing two properties
- With a bridge loan, what happens after current property sells?
- Financing for an Equity Rich, Cash Flow Poor Borrower
- Customer with No Landlord Experience Wants to Buy Rental Property
- Owner-Occupant with Rental in the Residence
- What is a Qualified Mortgage?
- What is “Ability-to-Repay”?
- Who is the CFPB?
- Transaction facing termination from stringent conforming rules
- Home with Unpermitted Improvements
- Finance Factors Land Loan financing
- Length of Land Loan
- Buy and then sell when market improves
- Evaluate borrower’s ability to qualify for financing
- Repair existing dwelling before listing for sale
- Construction loan to purchase land?
- Hazard Insurance for “tear-down” property purchase
- Difference between a multiple-collateral loan and a bridge loan
- Situations for a multiple-collateral loan
- Purchasing Property with Substantial Deferred Maintenance
- Non-conforming 2-unit property
- Legal non-conforming 2-unit property
My customer wants to purchase an agriculture-zoned property with a house and a piggery on the property. Can I get a residential loan or do I have to get a “farm” loan?
If an agriculture-zoned property has any type of farming operation, whether it involves livestock (i.e., piggery, chickens, stables for horses, etc.) or growing produce, Finance Factors will consider it for a portfolio residential loan program as long as there is a single-family dwelling in good condition on the property.
If such a dwelling exists on the property, then we will give no consideration to the value of the farm operations. This almost always results in a lower value than if consideration were given to the farm operations, which in the case of a purchase transaction will normally mean the buyer will need to bring in more cash to the transaction as the appraisal will typically be less than the sales price. If the buyer has other real estate with equity, we can cross-collateralize other property to lessen the need for additional cash down payment.
Because of this difference in value, we tend to do more refinances to borrowers who have owned their farm properties for a while and want to refinance into a lower rate/payment or get cash out.
With a bridge loan, what happens after current property sells?
What happens when my client sells their current property?
When their current property sells, we expect the borrower to apply the net proceeds to pay off or pay down our bridge loan. If the borrower cannot pay off the bridge loan in full, then we expect the borrower to secure a refinance loan (either through Finance Factors or another lender) for the remaining balance. This must occur simultaneously so we can release the lien on the property that is being sold.
If your client cannot get the timing of the refinance to coincide with the close of the sale, we may be able to do a partial release of collateral while the borrower completes the refinance transaction.
Financing for an Equity Rich, Cash Flow Poor Borrower
My client is equity rich and cash flow poor, and cannot qualify for the bridge loan payments. Is there any way to structure this type of situation?
Yes, if your client has enough equity we can increase the loan amount to not only cover the purchase price but also include closing costs and even enough money for the loan payments for the term of the bridge loan (12 months).
In the example to follow, we could increase our loan amount to about $875,000 to cover payments and closing costs for the borrower. The CLTV would still be only 54.17%.
Determining CLTV for securing two properties
How do you calculate combined loan-to-value (CLTV), if you are securing two properties?
We take the existing first lien on the property listed for sale and add that balance to the new Finance Factors bridge loan and divide that sum by the combined value of both properties.
- Property A (current property) is worth $1,000,000 and is listed for sale. It has a first mortgage balance of $100,000.
- Property B is being purchased for $800,000.
|$100,000 existing 1st lien + $800,000 new FF bridge loan
$1,000,000 Property A + $800,000 Property B
|=||$900,000 Combined Liens
$1,800,000 Combined Value
My client, who is a Japanese citizen and non-resident alien, purchased a luxury condo for $2,000,000 two years ago with cash. She would now like to get a line of credit for $200,000 to $500,000. What are her options?
Your client has several options depending on how large a home equity line of credit (HELOC) she wants. If she gets a line of credit for $250,000 or less we can probably use the tax assessment value of the condo in lieu of an appraisal, saving 2 to 4 weeks in processing time. HELOCs up to $250,000 also feature our best pricing. If she wants a HELOC above $250,000 up to $500,000, then we would need to run an appraisal, and she would be looking at a higher rate.
As a non-resident alien, we do not require U.S. credit nor U.S. income documentation. We do require that the client provide some type of income documentation showing her ability to pay (we may need assistance in translating any income documentation provided in a foreign language).
Additionally, due to challenges that may arise with clients residing internationally, we also require that the customer designate a “legal representative” who resides in Hawaii and is authorized to receive correspondence and other communications on the borrower’s behalf. We also require, as additional collateral, the equivalent of 6 months’ worth of PITI (principal, interest, taxes and insurance) and maintenance fees (for condos). This money is deposited in an interest-bearing secured Finance Factors savings account and is kept as additional collateral for the life of the loan.
Customer with No Landlord Experience Wants to Buy Rental Property
My clients want to purchase their first investment property. They have no previous experience as landlords. They cannot qualify for the loan if the rental income from the property is not considered?
We don’t require that the borrower have previous experience as a landlord, and can use rental projections for the purchase property, as well as for a property that the borrower will be moving out of to rent. We can also use rental agreements in lieu of tax returns to verify rental income. Lastly, we are able to use rent from the borrower’s residence where there is a “wetbar” unit with a rental agreement and tax returns.
Owner-Occupant with Rental in the Residence
My client has a property that has lots of equity and she has excellent credit. She is self-employed, but her income from the business alone is not sufficient to qualify her for the loan amount she wants. The client has a second unit in her home with a wetbar and the tenant pays $1,200 rent per month. She has a rental agreement and declares the rent on her tax return. Would Finance Factors accept the rental income?
Since the customer has a rental agreement and is declaring the income on her taxes, we would be able to consider the $1,200 in rents when determining the debt-to-income (DTI) ratio. We would take 75% of the rental income ($900) and net it against our proposed mortgage payment. In general, Finance Factors can consider rental income on someone’s residence and net it against our loan payment.
What is a Qualified Mortgage?
In simple terms, a Qualified Mortgage (or QM) refers to a new class of mortgage loans that are designed to be safer for the borrower and it is a loan a borrower should be able to repay. There are simple rules that make up a Finance Factors Qualified Mortgage:
- Borrower must have a total monthly debt-to-income (total amount of borrower debt to income earned by borrower) ratio of 43% or less. Debt-to-income is the primary factor in what lenders use to determine what to lend to a borrower)
- QMs can’t have risky features like negative amortization or interest-only payments
- Points and Fees charged are limited for QM
What is “Ability-to-Repay”?
When making a loan to a borrower, every lender should evaluate the individual’s “ability to repay” the loan. This means that the lender, when considering a borrower’s ability to repay the loan, will look at all factors for consideration (otherwise known as the 5 Cs of Lending):
- Capacity: to repay
- Cash: down payment
- Collateral: in good condition
- Character: Like longevity of employment, etc.
Who is the CFPB?
The Consumer Financial Protection Bureau, otherwise known as CFPB, was established by the United States Congress with the purpose of protecting consumers through consumer education, enforcing federal consumer financial laws, and studying financial markets and providers. Their mission is to make markets for consumer financial products and services work for Americans. They also supervise financial institutions with respect to the new rules created to protect homeowners and consumers shopping for a home mortgage from harmful practices.
Transaction facing termination from stringent conforming rules
I just found out that my purchase transaction does not conform to the current guidelines of a Freddie Mac loan. Are there any options for saving this deal?
Our lineup of specialty portfolio loans and custom underwriting guidelines can help with different non-conforming situations on your loan. For example, if you have a client with a house in poor condition, consider our ALT-Rehab loan at 89.9% LTV. Or a portfolio ARM that gets the borrower into the property so they can repair it and then pursue a fixed rate conforming loan. If it’s in “tear down” condition we can consider placing it into a land loan program.
Home with Unpermitted Improvements
My listing is in good condition, but has several hundred square feet of unpermitted improvements. Can a buyer get financing?
Yes, we finance properties with unpermitted improvements. We will require that the appraiser give no value to the unpermitted sections of the home and value only the permitted improvements. Depending on the extent of the unpermitted improvements we may also require a lower LTV.
Finance Factors Land Loan financing
Why should I choose Finance Factors for land loan financing?
Finance Factors is one of the few Hawaii lenders today that finance vacant land and tear-down properties. Here are some highlights of our land loan program:
- Vacant Lot Purchases.
Finance up to 75% of the purchase price or appraisal for residential-zoned lots, and up to 70% LTV on agricultural-zoned lots.
- Financing More Than 75% LTV.
If your client wants a larger loan amount, we can consider cross-collateralizing other property that the buyer may own. We can consider financing 100% or more of the purchase price of the property for sale by securing another property that has equity
- Putting less Money Down.
We will accept subordinate financing for clients that may be short on the necessary down payment requirement. We will consider loans with seller second mortgages as long as the buyer has 5% -10% of their own money into the transaction.
- Your Client is Prequalified for Construction Too.
We want to make sure that your client does not end up owning a lot but they can’t qualify for construction financing to build. We will evaluate if your borrower is qualified for future construction financing as part of our land loan financing process.
Construction loan to purchase land?
Instead of a land loan, can my client do a construction loan to purchase the land and then build?
While it is possible, it is very rare to do a construction loan when your client does not already own the land. A construction loan requires plans, specs, a construction contract, bond and a building permit. Normally a borrower will not be able to get all these things in place before purchasing a property (the seller won’t wait or let the buyer make this a contingency item).
However rare, there are two situations where we sometimes see this happen. One is where the transaction is between family members and therefore the borrower was able to get the plans and permit ahead of acquiring the property. The other is when the seller of the lot is including approved plans and permit in the sale of the lot.
Why are land loans not more than 3 years in length?
Lenders view land loans as temporary financing. Vacant land is one of the riskiest types of collateral for a lender, so therefore the lender is looking for the borrower to work diligently to build either an owner-occupant or investor dwelling before the maturity of the land loan.
Buy and then sell when market improves
What if my client wants to buy and then sell the lot when the market improves?
Finance Factors and most, if not all, other lenders do not do “speculative” residential land loans where a borrower is attempting to buy, hold and sell at some future date. Our goal in financing the acquisition of a vacant lot is for the borrower to build a dwelling on that lot prior to the maturity of the loan.
Evaluate borrower’s ability to qualify for financing
As part of the process of underwriting the land loan, we also evaluate the borrower’s ability to qualify for construction financing. What do you mean when you say that you want to “evaluate my client’s ability to build a dwelling”?
We want to make sure that your borrower does not end up owning a lot but that he or she can’t take the next step and build. Because a land loan is temporary financing of not more than 3 years, we want to see if your borrower has the means (cash flow), resources (liquidity or equity) and game plan (knows what he/she wants to build and who they want to use to build it) to get a home built. We will evaluate if the type and size of dwelling is appropriate for the neighborhood, if your borrower is qualified for future construction financing and if there will be enough equity to qualify for future construction financing.
Repair existing dwelling before listing for sale
My client wants to repair the existing dwelling on the property before listing it for sale. Does he do a land loan or construction loan?
In some instances, if a client is planning to do major repairs to an existing dwelling, and can verify the additional reserves to do them, we may recommend doing a long-term loan instead of a land loan. However, we still would evaluate loan-to-value on site value alone, not giving consideration to the cost of improvements.
Hazard Insurance for “tear-down” property purchase
Do I need hazard insurance if my borrower is getting a land loan to purchase a “tear-down” property?
Because we would ask the appraiser to exclude the value of the improvements when appraising a “tear-down”, there is normally no requirement to carry hazard insurance (fire and wind) on the property. However, if the property is in a flood zone then by law the borrower must get flood insurance for the dwelling, regardless of its condition.
Difference between a multiple-collateral loan and a bridge loan
What is the difference between a multiple-collateral loan and a bridge loan?
A bridge loan is a single loan using equity in a property listed for sale to buy a replacement property. A buyer will normally get a bridge loan when they don’t want to submit a purchase offer containing a sales contingency.
A multiple-collateral loan is also a single loan securing more than one property, but the buyer is not selling any of the properties being secured by the loan. The buyer is merely using the equity in his or her properties in lieu of cash to facilitate a purchase.
Situations for a multiple-collateral loan
What situations would you suggest for a multiple-collateral loan?
- Properties in Poor Condition including tear-down condition properties
- Similar to a vacant lot purchase, when the condition of the existing home is too poor to give it any value in the appraisal, we can do a land loan instead of a long-term loan
- Multi-million dollar purchases over $3 million
- Using more than one property as collateral can allow a high net worth client leverage their equity in their real estate holdings instead of liquidating stocks or other liquid assets.
- Investor purchases
- Investors looking to grow their real estate holdings can cross-collateralize different types of properties
- Purchasing with no cash down payment
- Use the equity from one or more existing properties to purchase a new property and eliminate the need to have a cash down payment.
Purchasing Property with Substantial Deferred Maintenance
I have a client that wants to purchase a property with substantial deferred maintenance with the intention of repairing it and then selling it. What options can you offer?
There are two key items to address with this kind of situation – LTV and cash to repair.
In determining loan amount and LTV, we will normally appraise the property “as is” and ask the appraiser to provide a “cost to cure” to bring the property up to normal condition. In cases where the repairs are so substantial and the condition of the property is so bad that the appraiser cannot provide a cost to cure, we will normally look to base our LTV and loan amount off of the site value of the property, and give no consideration to the value of existing improvements. Call us with your specific situation and we can give you a good idea of what LTV we can consider.
The second item we look at is whether the borrower has sufficient liquid assets to complete the repairs to the property. We compare any estimates or bids that the borrower may have to what the appraiser estimates repair costs to be. We want to have a good comfort level that the borrower will be able to successfully complete the repairs to the property after acquisition.
Lastly, we have no prepayment penalties and have no prohibition against the borrower paying off our loan early should they sell the property.
Non-conforming 2-unit property
My customer wants to purchase a 2-story single family dwelling. There is no interior access between the first and second floor and there is a second non-legal kitchen. How do you value a property like this and can you even lend on it? Can you consider rent from one of the units if the owner lives in the other?
We would ask the appraiser to appraise the property “as is” and to identify “cost to cure” for the deficiencies (no interior access and second kitchen). We would lend the property “as is” based on the lower of appraisal or purchase price. We would probably use existing rental contracts or rental ads (such as Craigslist) to determine the market rent for one or both units. Finance Factors takes 75% of the gross rent and nets it out against our loan payment when determining the DTI ratio, even when one unit is owner-occupied and the other unit is rented.
Legal non-conforming 2-unit property
I have a client that wants to purchase a legal non-conforming 2-unit property. When the dwellings were originally built, the zoning on the lot allowed for two legal units on the property. Since that time the zoning has changed and now only one dwelling is permitted on the lot. So if the buildings burned down, only one unit could be rebuilt. How would Finance Factors look at something like this?
We generally treat legal non-conforming the same as any other property. So in this case we would appraise the property giving full value to both living units. We would require hazard insurance on both units and would also be able to consider the rent from one or both units, whatever the case may be. If there was a fire and one dwelling was destroyed and could not be rebuilt, we would probably require that the insurance proceeds go toward paying down our Finance Factors loan balance. If both units burned down and only one could be rebuilt, we would work with the homeowner to ensure that we were at an acceptable LTV based on the future value of the property, and any excess funds over and above what is necessary to rebuild be applied against the loan balance.
Specialty property listed for sale
I have a customer who is a contractor/developer that built a high-end home for cash on a large parcel with awesome views. The customer does not occupy the property. Property is free and clear and the appraised value is $2 million and the home is listed for sale and is being actively marketed. The customer wants to borrow $600,000 to do additional landscaping, including adding a pool and some water features, to make the property more appealing and facilitate a higher sales price. The customer can’t show much in the way of income since he has been working on this project for the past 2 years. What can Finance Factors offer?
Since this is an investment property, Finance Factors can offer the customer a short term loan to borrow the money for the landscaping work on the property plus give the customer 12 months’ of funds secured in a Finance Factors savings account to use for the loan payments for the duration of the loan. We would want a copy of the listing agreement and a marketing plan from the borrower’s Realtor since we are relying on the sale of the property to ultimately pay us off. We would also want to make sure that the customer filed a Notice of Completion on the construction to ensure that there are no potential mechanic’s lien problems. If a Notice of Completion was not filed, we would want to determine if the Final Inspection was completed by the county and then we would work with the title company to see if we can get a mechanic’s lien endorsement to protect ourselves against any possible mechanic liens on the property.
*Important Notice:The loan scenarios described above are provided for informational purposes only. The making of any loan and the terms thereof are subject to Finance Factors’ underwriting approval.