Rehab Loans for Investment Properties

Financing investment property can be a challenge, especially in today’s volatile lending environment. There are essentially 3 methods of financing non owner occupied properties:

1. “Conforming” loans offered by Banks or Brokers which are sold to Fannie Mae and Freddie Mac. As of this writing, at least 15% of the purchase price is required as a down payment.
   Advantages: Lowest rate % fees, /- 21 days to close escrow.
   Disadvantages: Highest qualifying requirements. Very strict on property condition and on credit and income. Does not allow “Stated” loans.
2. Portfolio lenders are Banks that lend and service their own money. They will never sell the loan and are free to set their own guidelines.
   Advantages: Average rate and fees, less restrictive guidelines
   Disadvantages: /- 30 days to close escrow, may require unusual documentation, programs available may be limited
3. Hard Money loans are made by money brokers, groups or individual investors. Mostly unregulated, loans are based only on equity in the property.
   Advantages: /- 7 days to close escrow, stated income and bad credit OK
   Disadvantages: High rates and fees

Which is the right choice?
Cost is always an issue.

Conventional           Portfolio           Hard Money
6.25%-7.00%      9.00-12.00%      12.00-20.00%
1-2 “Points”          2-5 “Points”        6-15 “Points”
Hard Money rate&costs are not typos

Often, the method of financing or type/condition of property will determine which type of financing is available. 

                       Property trashed   Bad Credit   No Income   Creative Financing
Conventional       No                     No             No               No
Portfolio              Yes                   Yes           Sometimes   Sometimes
Hard Money        Yes                    Yes            Yes              Always

It is clear that Conventional loans are the least flexible, and Hard Money is the most. But that flexibility is very risky and thus expensive.

Scenario: You are in contract to buy a foreclosed home. You have excellent credit and have been approved for a low cost loan through your bank. The property inspector finds extensive repairs are necessary to the plumbing and roof. Even though the seller will discount the sales price steeply, your bank declines the loan calling the property “uninhabitable”. But you can instead secure a rehab loan, which will often finance the needed repairs and allow you to complete the transaction.
Example:
After repairs Appraised Value*   $310,000 *loan is based on this
Purchase Price                           -$200,000
Repairs                                      -$25,000
Closing Costs                            -$10,000
New loan                                  $217,000
Cash to close                           =$18,000
In this case a normal Fannie Mae loan would have required 20% down or $40,000, plus repairs so this investor benefits by holding onto as much of his cash as possible.

A word of warning:
Many times we have seen brokers or bank loan officers try to force loans with marginal credit, income, assets or properties through Conventional financing. They have a vested interest this happening because often that is the only product they carry. There is no subprime loans any longer and if one Conventional lender denies it, chances are all others will also, unless your loan officer is committing fraud. Fraud can take many faces, more subtle forms include investment property being claimed as primary residence, inflating rents, misrepresenting the condition of the property or influencing the appraisers. Outright forms include forging signatures, counterfeiting asset or income documents or editing appraisals. REMEMBER: if your lender commits fraud on your behalf, you are partially responsible. Review the initial disclosures and the final loan application closely and confirm it is accurate. Report fraudulent activity to the FBI http://www.fbi.gov (202) 324-3000 – National FBI Financial Institution Fraud Unit.
It is sometimes difficult to be sure what you are getting with a loan officer. It is very important to investigate the certifications and qualifications of your lender. DRE License search Also, when dealing with hard money, it is best to use an experienced broker with a multitude of local funding sources. Often times the loan you think your broker is working on is actually been referred through a chain of 2 or more brokers, all getting a piece of the action. This is called co-brokering, and while technically legal, steeply increases the costs, and negatively affects your chances to obtain financing.

The best one can do is to inform themselves as best they can about lending sources, keep up on trends and the people they work with, and only deal with lenders you trust. I hope this has been helpful to you and I wish you luck in your pursuit of financing.

If your transaction is in California, I’m happy to talk to you; you can view my Zillow.com lender profile here or contact me toll free 800-266-0540 extension 708.

Aaron Opfell

DRE licensed loan officer

Investment Finace Specialist