Hard equity loans: 12 creative techniquesGary Opperhard equity loan, loan options Anyone could do (it). All they have to do is think! Thomas A. Edison Tired of spending two to three weeks gathering documents and information from a borrower? After the submission, are you waiting impatiently for days for the lender's conditions? Do you spend another week satisfying arbitrary conditions of a faceless lender's underwriter? How about a loan that allows you and your client to control mortgage terms? How about a mortgage that is specifically tailored to your client's needs? Would you prefer this to a lender's securitization manual developed by a Wall Street MBA who lives with his parents in New Jersey? A hard equity loan is flexible and quick. Since most hard equity lenders are private individuals and not large multi-state lenders, they have the ability to satisfy your client's needs and can close in as little as one to three days. The only processing you do is order the title. The only underwriting involves a quick look at the real property. As you will see, there are many programs and techniques that expand the marketability of hard equity loans. A hard equity loan serves only three borrower profiles: *Borrowers who need cash immediately *Borrowers who do not qualify for conventional financing because of income, employment, credit and/or the property. *Borrowers who need a loan to straighten out a situation and need a little breathing room. The programs and techniques outlined below will help you close more loans. Your increased creativity will set you above the average mortgage professional. In many instances, a program may need to be modified to your borrower's circumstances. Since mortgage professionals must obey state and federal laws, not all programs may be available. Low start interest rate Hard equity loans have higher interest rates than a conforming loan. However, a hard equity loan can start at a lower interest rate and then increase to a higher interest rate. The duration of the lower interest rate can be from three months to an extended period of five years. The benefit is that the borrower is allowed a reduced payment for a period of time to catch up with other bills. For example, the mortgage note can be written so that the interest rate for the next three months is at 9.9% per annum and then the interest rate increases for the next 14 years. Alternatively, if the interest rate for the first five years is 11% per annum, then the interest rate would increase for the next 20 years. Long-term loans Most hard equity loans are for five years. The loans have a monthly amortization period that may be for 15 years, 30 years, or interest only. Hard equity loans can be written long-term. That is, for terms of 15, 20, 30, or 40 years with no balloons. Usually, the benefit of a long-term loan is that the borrower is more comfortable with it. That is because there is no pressure to refinance or no balloon. Hard equity lenders should not worry about whether or not the loan is short- or long-term. This is because the loan may not last that long (the borrowers will refinance the high interest rate), the borrowers may sell their home long before the loan matures, or if the loan is not paid off early, the lender may continue to earn a high interest rate. No payments for a time period Sometimes a borrower needs a hiatus from making any monthly mortgage payments. These reasons could include a need to catch up with other debts, bridge a loan, or starting a new job. This program may provide for the borrower to not make payments until a predetermined date. The number of days can vary from 60 days to the entire first year. Alternatively, the borrower can have a provision that one or more payments, instead of being paid when due, could be deferred and added to the end of the mortgage. This provision can be used by the borrower to give the mortgager a second chance, to have extra gift money during the holidays, or to provide the borrower with cash to catch-up on some other debts. For example, the borrower may have executed a 15-year mortgage with the first payment deferred for six months. In another instance, suppose that after the borrowers have been paying for two years on their 30-year mortgage, they have a new baby. They may exercise their option to defer 12 monthly payments. Tailored payments Most mortgages provide for equal monthly payments during the entire mortgage. At maturity, the mortgage balance is either zero or the mortgage balloons. Mortgage payments can be tailored to satisfy the needs of the customer and not the lender's matrix. If a borrower's business or employment is seasonal, then the payments can be geared to larger payments during the "feast" period and smaller payments during the "famine" period. Seasonal industries may include carnivals, lodging, restaurants, entertainment, and agriculture. For example, suppose a seasonal worker has a $60,000 mortgage that has a 15-year amortization with an $800 monthly payment. The payments can be adjusted so that the monthly payment from September to April is $1,000 and the monthly payment from May to August is $400. One lump sum payment loans Sometimes, due to the purpose of the loan, one lump sum payment at the end of the mortgage is a good program for a borrower. Candidates for this program include borrowers who are likely to receive a fairly certain large sum of money in the future. Another consideration could be an unemployed borrower who needs a lump sum of cash now, but in the future, could repay the loan by making payments from a new job. These future lump sums include a large contract receipt, inheritance, a large home or stock sale, or the sale of a business. On this loan, the accrued interest and the principal are due at maturity. The borrower may need the cash now, but could not afford the monthly payments. For example, the borrower could borrow $75,000 with the principal and the interest due in three years. The borrower might owe $117,000 at maturity. The borrower could use the lump sum to pay the balloon. Or, if the borrower is now able to make monthly mortgage payments, a repayment program could begin. Second and third mortgages Hard equity loans can be a first, second, or third loan. As long as the loan-to-value (LTV) and the superior mortgage(s) to subordinate mortgage ratio (SSR) is adequate, the loan should be made. The range of maximum loan-to-values of a hard equity loan are: *first mortgages 65% *second mortgage 50% to 65% *third mortgages 50% to 60% The SSR is calculated as follows. If the superior mortgage(s) is $80,000 and the subject subordinate mortgage is $20,000 then the SSR is 4:1 ($80,000/$20,000). Hard equity lenders' SSR's are usually between 1:1 and 7:1. If the LTV is low enough, the hard equity lender will not be too concerned with the SSR in making a second mortgage. If the LTV and SSR are low enough, a hard equity lender may be willing to make a third mortgage, which are rare. A borrower may use a second or third mortgage when he does not want to disturb the superior mortgage(s). This occurs when the interest rate is low and/or the superior mortgage(s) has a relatively small time period before maturity. Wrap mortgages Some hard equity lenders reduce the loan-to-value of a second mortgage to 60% but allow 65% LTV on a first mortgage. Sometimes, a borrower may want to only borrow a small amount on a second mortgage compared to the first mortgage. A hard equity lender may not want to fund a small second mortgage high SSR transaction. The creative Mortgage Broker will convert a small second mortgage into a larger wrap second mortgage. Thus, the mortgage brokerage commission will be higher. The second mortgage will encompass the first mortgage balance-the amount needed by the borrower and the closing costs. The interest rate should be lower than the new small second hard equity loan, and be a blend of a second hard equity loan interest rate and an interest rate a few points higher than the first mortgage interest rate. The mortgage can be tailored to have the wrap second mortgage payoff earlier than the underlying first mortgage, at which time, the borrower will again be paying the first mortgage directly. However, the wrap mortgage may not be tailored to be paid off first. Even in that case, the borrower will still have the low interest rate first mortgage in place when the second wrap mortgage is paid off. An example is as follows. The borrower has a first mortgage of $150,000 at 7% with 21 years left on a 30-year amortization and payments of $1,137.71. The borrower wants to borrower $15,000. The SSR is a very high ratio of 10:1. The loan can be structured as a $165,000 wrap mortgage with monthly payments of about $1,600 for 60 months, followed by 192 payments of exactly the same amount as the first mortgage. The interest rate would be a low 7.70% per annum for the entire 21 years of the mortgage. Furthermore, the wrap mortgage would be satisfied after the 60th payment. Thereafter, the borrower would resume paying the first mortgage directly. The wrap mortgage payments can be lowered by increasing the term that the wrap mortgage would stay in effect to satisfy the borrower's needs and ability to pay. Of course, anytime that the borrower paid the difference between the wrap mortgage and the underlying mortgage, the lender would satisfy the wrap mortgage. Thus, the low interest rate first mortgage would be preserved. The benefit of the wrap mortgage is that the borrowers' underlying first mortgage is available when the wrap mortgage is satisfied. The advantage to the lender is that the first mortgage will be paid and the interest yield on the transaction can be enhanced. Cross-collateralized loans In many cases, the subject property does not have sufficient equity to support the proposed hard equity loan. However, the borrower may have other real property that could be pledged as additional collateral. With the additional real property, the hard equity lender will close the loan since the collateral is adequate. Sometimes assets other than real estate may be acceptable. Lines of credit A hard equity line of credit can be established easier than a line of credit at a bank. The hard equity line of credit can be used and repaid following the borrower's needs. A line of credit provides money that a borrower can repay repeatedly under the terms of the mortgage. For example, a borrower with a $100,000 line of credit could borrow the $100,000 and repay $50,000 a month later and then borrow $25,000 more for 12 months. The interest on the mortgage would be payable monthly. The borrowing and repaying could continue until the mortgage matures. The benefit to the borrower is that money can be borrowed when needed and repaid when the borrower has extra money, thus saving interest charges. The benefit to the Mortgage Broker may be a larger loan and higher commission. Future advances Many times a loan is closed and a short while later the borrower needs more money. Some costs to your borrower can be eliminated if the first closing took into account the possible need for additional money. The mortgage can provide for a future advance. This will allow your borrower to receive from the lender an additional amount of money agreed to at closing. For example, the borrower may need $30,000 now but may have a future need for $40,000. The mortgage would close and get $30,000, and have a future advance clause for $40,000. The borrower could borrow the additional $40,000 at any time when the mortgage is outstanding. The benefit is that the borrower would not incur any more costs. The benefit to the Mortgage Broker may be a larger loan and higher commission. Portable loans When a borrower sells a home, the borrower generally buys a new home. Probably, both the new and old homes have a mortgage. If the mortgage could be transferred from the old to the new property, the borrower could save time and money. A hard equity lender may be amenable to letting the borrower transfer the mortgage from the old to the new property. Combination mortgages Hard equity loans can be as creative as you can make them, and may contain elements of two or more of the above techniques. For example, you could have a hard equity loan that has a low start interest rate, is long term, and has no payments for 90 days. Summary Above are 12 creative techniques to help you close more of your borrower's loans and produce more commissions for you. Use your creativity to close even more loans! You should modify the strategies to fit your borrower's needs and not try to fit the borrower's loan to the lender's loan matrix. Gary Opper is president of Approved Financial Corporation, a licensed mortgage lender headquartered in Weston, Florida. He may be reached at (954) 384-4557, fax (954)384-5483, or e-mail [email protected] © Gary Opper All Rights Reserved.