Two or three times a week I get requests for rate quotes and program information for hard money and “Alternative (Alt) Doc Sub Prime” loans for self-employed persons.
Most inquiries are last minute and desperate in nature as the contingencies are expiring and it’s evident conventional and FHA financing is not the answer.
Hard money is seen as a last “Hail Mary” to save the deal. The bad news is, even when buyers have hard money options, rarely does the buyer choose to proceed to close escrow.
For those who do, many other obstacles remain and very few hard money or any Alt Doc loans close.
1. Most loan brokers seldom get requests for this type of lending and subsequently have not cultivated an ongoing relationship with hard money investors.
2. Most brokers simply send the loan application to another broker who sends it somewhere else; all the time dragging out the process, adding fees and time and killing the transaction.
3. Buyers run around all over town applying everywhere. Their credit report shows a paper trail of credit inquiries.
No loan officer wants to be “the backup lender.” The end result is no one like to work on the loan because loans with the best chance of closing, always have priority.
If you do however, choose to pursue a hard money or Alt-doc loan, get ready for a rate and fee shock.
Rates and Fees.
Payment Shock Rates for these types of loans typically range from 7.9% to 10.9% with 2-4 points, double the rate and fees of Fannie/Freddie financing.
Typically the loan is only a “2-year fixed interest only” with a 6-month to 1 -year pre-payment penalty.
Between 30-40% down. If the home is a “fixer,” more of a downpayment may be required.
Alt-Doc Bank Statement Loans.
(Banks usually want to see 12-24 months of bank statements)
A few years ago, these were viable loan products, but Wall Street is not buying them on the secondary market, so these loan are not really very difficult to find. However, that doesn’t keep mortgage companies from advertising them. (It’s a “bell ringer” many loan officers tell me).
Here are the underwriting guidelines:
1. Typically the down payment is 30-40% and the buyer must have 6 months reserves for all properties and a 720 Fico. These criteria requirements eliminate 90% of the buyers.
2. The down payment money must come from personal accounts only. “Business funds” cannot be used for a down payment.
3. The dilemma is that many self-employed persons form LLC corporations. Their common tax-deferring strategy is to leave money “in the corporation” rolling it over to future tax years.
4. Personal taxes aren’t assessed until the money is withdrawn from the corporation. So home buyers become reluctant to withdraw a large sum of cash (and incur the federal-state and social security tax) just to get a new home.
5. Dodd- Frank – This is the final heart-breaker which only reveals itself during the Final “QC” check (quality control).
Hard money/Alt Doc loans are considered high cost loans and can only be used to Purchase investment properties.
If you are a first time buyer or a move-up buyer with no another properties, the hard money investor will decline the deal at the final hour (trust me on this, it happened to a deal I [thankfully] declined to originate.
In Conclusion, there’s no easy way to say this: When a deal is dead, it’s dead! False hope puts at risk earnest money deposits and incurs needless appraisal/inspection fees. The lender isn’t doing anyone any favor by dragging out the process with false hope. In reality, what they owe you is a COMPLETE AND TIMELY EXPLANATION.
Written by Daniel Dobbs
Daniel Dobbs has a Real Estate blog, DanielDobbs.org that attracts over 50k readers a month.