Frequently Asked Questions
1. Do I need a down payment?
Yes, you will need at a minimum 30% of the PURCHASE PRICE in cash for a down payment. The exception for not having a down payment would be you own other property with substantial equity to use as crosscollateral as explained in FAQ #11 below.
2. Why do they call it “hard money”, “private money” or “equity loans”?
The loan is primarily based on the value and “equity” of the “hard” assets used as collateral as opposed to the borrower’s credit rating or income. These loans are also referred to as “private money loans”, as the source of the funds do not come from conventional bank loans but instead come from private sources such as investor’s personal funds, pension plans and other non-traditional sources. These funding sources have more flexibility in their lending practices and do not have to fulfill the more stringent FDIC and governmental mandated lending requirements of the traditional bank.
3. How does the Federal Tax Credit work?
For First Time Home Buyers, which is defined by anyone who has not owned a home in the past three years, the government is offering a TAX CREDIT of 10% of the purchase price up to $8,000, to buyer's of homes they are purchasing for owner occupancy. To the best of our understanding, what this means to the borrower is that for buying a home you may qualify for an $8,000 discount on your federal income tax obligations. If you owe no taxes, or owe less than $8000 in federal income tax, you would get a check from the government for the difference at such time as you file your taxes. For example, you owe $2000 in federal income tax, with the tax credit, you would pay no federal income tax, getting a $2000 tax refund from withheld taxes AND get a check from the government for $6,000, for a total of $8000 back in your pocket. You do not have to pay back the $8,000 as long as you keep the home for at least three years. There is also a tax credit for current home owners looking for a replacement primary residence of up to $6,500. Since we are not attorneys or CPA's, please consult your tax advisor on this matter to find out if you qualify for these credits and confirm qualifying dates. Current tax law offers these credits for owner occupied homes purchased prior to April 1, 2010 with closing to take place before July 1, 2010.
4. What exactly is “interest”?
We have always described interest as “rent on money”. When you take out a loan, you are renting money. The interest is the rent. The more you owe, the more rent you pay. The less you owe, the less in rent on the borrowed money you will have to pay. Interest paid on real estate is usually tax deductible (consult with your tax advisor). If you pay your principal down and then still make the same monthly payment, your payment funds are first applied to the interest or rent on the money still owed, and the rest to principal.
5. How do I pre-qualify for a BRAD LOAN?
Just fill out the loan application and hit send! If you are pre-qualified, and you want to move ahead with the loan process, it is at that time we will ask for your social security number to enable us to run credit. We will also need a copy of your purchase contract, a copy of a bank statement showing the source of your down payment funds, and we will order the appraisal.
6. Do you require any up front funds to start the loan process?
Once you have a property under contract, and you have decided to move forward to purchase the property with a BRAD LOAN, we require a $535 deposit toward your loan costs and a separate check made payable to the appraiser (typically $350). If you choose not to close your loan for any reason, you will forfeit the $535 deposit. Your appraisal fee becomes non-refundable at such time as appraiser commences the appraisal process. Should we choose not to close on the loan, your deposit will be fully refunded to you.
7. Will you run a credit report?
Yes, however our loan decisions are not based on your credit score. Running your credit report helps us to know our borrower better. We will not run your credit report until you authorize us to do so. We do not request your social security number to run a credit report until you tell us you want to move forward.
8. What is a NO DOC, LOW DOC, FULL DOC loan?
No doc is when we approve a loan based primarily on the amount of down payment, a review of the credit report and the appraisal. Low doc is when we ask for all or one of the following: a bank statement, pay stub, 1099, etc. Full doc is when we require the most recent 2 years of federal tax returns and W-2's, the most recent 30 days of pay stubs, your most recent 60 days of bank statements.
9. What is LTV?
LTV stands for Loan to Value. It is expressed as a percentage of the debt owed in relation to the value of the real estate. The higher the LTV, the higher the risk to the Lender. Here are some examples. If you are borrowing $60,000 on a $100,000 property, you divide $60,000 by $100,000 to get a 60% Loan To Value or a 60% LTV.
10. What is CLTV?
CLTV stands for Combined Loan To Value. If you take out a $60,000 first mortgage, and the Seller provides a $30,000 Seller carry-back, and the purchase price is $100,000, the CLTV or the Combined Loan to Value is a 90% CLTV. You arrive at that figure by adding the total amount of loans, $60,000 + $30,000 = $90,000. Divide the total combined loan amounts, $90,000, by the purchase price of $100,000, and this equals 90, making for a 90% Combined Loan To Value.
11. What is “Cross Collateralization”?
When more than one property is used as collateral for the loan. For example, you want to buy a $100,000 property with no cash down. You own another property that is worth $110,000, and you only owe $30,000 on it. You have $80,000 worth of equity. We could loan you 100% of your purchase price (no money down) because we would use both properties as collateral. You are pledging the equity in your additional collateral as additional security for your loan in lieu of putting up a cash down payment.
12. If I have “cross collateralized” will I have to pay off the entire loan if I want to sell or re-finance one of the two properties?
No, you would only have to pay off a portion of your loan to release the property you wanted to sell or refinance from the lien. This is usually a pre-determined amount at the time your loan is originated, and is called a “release price”.
13. Can loan costs be rolled in to my loan?
In some cases, yes. A portion of loan costs can sometimes be rolled into your loan in the event of your appraisal being substantially higher than your purchase price.
14. What are Origination Fees and Discount Points?
A mortgage broker charges an origination fee commonly referred to as points, it is considered a “commission” for arranging your loan. The lender also charges points, commonly referred to as “discount points”, which are additional fees to enhance the return to the lender on their investment over and above the stated interest rate on the note which gives the lender additional incentive to take the risk and make you the loan.
15. What are “points”?
A “point” equals one percent of a loan amount. For example, one point on a $70,000 loan is 1% of $70,000 which equals $700.00. Points are charged on the loan amount, not on the purchase price. If you were taking out a $70,000 loan, and there were 3 points origination fee, a 3 points loan discount fee, you would add the two together, to arrive at 6 points, and then take 6% of $70,000 to arrive at a points cost of $4,200.00.
16. What are Administrative fees; Underwriting, Processing, Document Preparation, Lender Inspection?
Underwriting is one of our due diligence functions; gathering, reviewing and assessing information about you and the property to determine if the loan is viable. Processing is working with the Title Company, title issues, escrow officer, realtors, insurance agents, appraisers, borrower’s documentation, etc, and coordination of all the previous mentioned functions and people to help bring your loan to fruition. Document preparation is the preparation of your all loan documents. Lender inspection is part of our due diligence when the lender makes a site visit to the subject property and neighborhood to determine if it is the kind of property we are comfortable with as collateral for the loan.
17. Are “points” deductible on my taxes?
While we do not give tax advice, “points” are generally fully deductible as prepaid interest on a purchase. They are treated differently on a re-finance. Regular interest paid is also usually deductible on your taxes as well. Please consult your Tax Advisor on these matters.
18. What are my costs in getting a loan?
Much of this is explained on the Loan Programs page as it relates to fees and points to the mortgage broker and lender, but you should also be aware of other third party fees such as title insurance required by a lender to insure their lien is in first position, escrow fees charged by the title company for their assistance with the transaction, loan servicing set up fees charged by a the account servicing agent (usually $325) appraisal fees paid to an appraiser (usually $350 to $450). As an example, on a $70,000 loan, you can expect these additional 3rd party fees to add up to approximately $1,300 or so.
The bottom line costs for the example of a 12 month $70,000 loan: 6 points is $4,200, administrative fees of approximately $1,800 (underwriting $495, processing $475, document preparation $395, lender inspection $295), 3rd party fees of approximately $1,300, for a total of approximately $7,200. Always ask for an “Investor Discount” on Title Company fees. You will also need to have property \ fire insurance paid one year in advance and a few hundred dollars to advance in to your impound account for future taxes and insurance.
19. What happens when my loan comes all due and payable?
We suggest you contact us three months prior to your ALL DUE date to discuss your options of refinancing to a conventional loan (if you and your property qualify) or paying a fee for an extension (if offered at that time by the Lender), or seeking financing elsewhere.
20. Will my loan amount be based on purchase price or appraised value?
On a purchase, regardless of the appraisal or perceived below market purchase price, your loan to value (LTV) will be determined by the purchase price. On properties that you have owned over one year, or have been substantially improved since purchase, we will typically lend based on the appraised value or on acquisition cost plus improvement costs.
21. What is “Subordinate” financing?
It would be 2nd position financing behind our 1st position mortgage. For example, you want to buy a $100,000 property with a small down payment. You might get a BRAD LOAN for $60,000, and the Seller of the property might take a seller carry-back for $30,000, so now you only have to put $10,000 down, since you financed $60,000 plus $30,000 for a total financed of $90,000. In this example, the Seller “subordinated “to the BRAD LOAN first mortgage. Conventional lenders often do not allow this, but the BRAD LOAN does.
22. How much can I re-finance if or when I convert into a conventional bank loan?
Depending on your lender, and generally speaking, new conventional financing will provide a new loan based on your loan to value per the “appraisal” if you have owned the property at least one year. If you refinance prior to one year, conventional lenders will usually lend on a loan to value based on your actual purchase price. This is why we offer the 14 month loan as one of our loan programs to give the borrower some breathing room in the event the lender wants the property ownership “seasoned” for a full year.
23. Who keeps track of my payments, and takes care of paying my insurance and taxes? What is loan servicing or account servicing and what do they do? Why do lenders require impound accounts?
We set up your loan servicing with a third party “Loan Servicing Agent”, also referred to as an “Account Servicing Agent”, which is a typically a division of a Title Company. Regardless of the Title Company your loan is closed at, we use Grand Canyon Title Agency Account Servicing to service THE BRAD LOAN. You are assigned an account #, and are sent a payment coupon book. You mail your payments directly to the Loan Servicing Agent, they process your payment, retain the amount to be held in escrow (also known as your impound account) for taxes and insurance, and forward the balance on to the lender. They see to it that the extra money you send in each month for taxes and insurance (the impound account) is paid out timely to insure both you, and the lender, your insurance and taxes are paid when due and kept current. Unpaid taxes and insurance creates additional exposure and risk for the lender, so lenders usually require the set up of an impound account to be sure insurance is keep current, helping protect their collateral against uninsured fire or other such hazards as well as insuring funds are set aside to pay real estate taxes to prevent an occurrence of unpaid taxes which become a lien on the collateralized property. This 3rd party Loan Servicing Agent keeps track of your payments and how much you owe. They also send you a year end statement reporting to you how much you have paid in interest, taxes and insurance to use for your income tax deductions. In the event you want to pay off your loan due to sale or refinance, or any other reason, you, or the Title Company you are working with for your sale or refinance transaction, would contact the Loan Servicing Agent for the “payoff” statement, and the payoff of the loan would be made to the Loan Servicing Agent.
24. How long do I have to keep my loan?
You can pay your loan off at any time with no pre-payment penalty. You can pay if off the next day after you get the loan if you want. Do be aware of FHA and Conventional Lending rules of Conventional lender’s that may be re-financing you or financing your buyer, as they often require that you, as the owner or seller, have owned the property for minimum periods of time, often 3 months, 6 months or a year, depending on the circumstances. You will want to investigate.
25. What do I do if I want to sell or pay off my property?
If you have a buyer for your property you simply have the Title Company you are selling your property through contact the Account Servicing Agent with your account number. Account Servicing provides the Title Company with a “payoff” statement, and the Title Company use’s your sale or re-fi proceeds to pay off your loan and the Account Servicing Agent releases your lien.
26. What if I sell or payoff my loan and there is unspent money in my impound account?
Any funds in your impound account not used to pay your insurance and taxes will be refunded to you by the Account Servicing Agent. This is your money.
27. Interest Only vs an Amortized Payment?
An interest only loan, which is what we usually provide, means you only have to pay the interest due each month, but if you want to pay your loan principal down, you can pay any amount you want extra each month in addition to your interest, taxes and insurance payment, and the extra will apply to principal reduction. An amortized payment forces you to pay principal as well as your interest each month. It does not give you the option of keeping a payment lower by not having to pay principal. In either event, you are only charged interest, which is nothing more than “rent” on money, on the amount of your principal balance. Any extra money paid over and above your monthly interest charge is applied to pay down your principal balance, resulting in lower interest charges the following month.
28. Do you have loan programs that will help finance renovation costs if I am buying a property in need of substantial renovations?
We sure do. Please refer to the Loan Programs page.
29. What happens if my loan is sold to another investor?
All the terms and conditions of your loan remain exactly the same, except the payments will be made to another investor. In the event your loan was sold to another investor, you would be first notified of such by the original lender. Never make payments elsewhere unless you are instructed to do so by your original lender.
30. What is Seller Carry-Back Financing?
It is when the Seller finances a portion of the purchase. An example would be you buy a home for $100,000, you obtain a 60% LTV BRAD LOAN ($60,000), you put up a $20,000 down payment, and the Seller finances the remaining $20,000 in second position behind the $60,000 first mortgage. $60,000 first mortgage + 20,000 cash down payment + $20,000 seller financing = $100,000 purchase price. In this example, in addition to down payment, you would need additional cash for your closing costs and loan fees unless the Mortgage Lender or Seller agreed to finance them as well.
31. What is “Cash–Out” financing?
It is when you take out a loan to wind up with cash for other purposes than to purchase the property secured by the loan. For example, you have a property worth $100,000. You currently owe $20,000; you obtain a new BRAD LOAN for $60,000 using the same property as collateral. Your $20,000 old mortgage gets paid off, and you receive $40,000, less closing costs and loan fees, in cash to do with as you please.
32. Can I hold the property in the name of an LLC or Corporation?
Yes, provided the principals of the entity sign "personal guaranty's".
33. Will my Brad Loan appear on my credit report?
No, however the loan servicing agent can provide you with a printout of payment history to use in applying for future refinance. (a foreclosure proceeding would appear on your credit report)
