Loan Scenarios



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.

Agriculture-Zoned Properties
Financing Farm Property. (originally posted 1/15/13)

Bridge Loans
Determining CLTV for securing two properties. (originally posted 7/30/13)
What happens after current property sells? (originally posted 7/30/13)
Financing for an Equity Rich, Cash Flow Poor Borrower. (originally posted 7/30/13)

Construction Loans
What do I need for a construction loan? (originally posted 11/26/13)

Creative HELOC Financing
Home Equity Line of Credit. (originally posted 6/18/13)

Foreign Investor
HELOC for Foreign Investor (originally posted 1/15/13)

Home Purchase
Portfolio Loans and Unique Underwriting. (originally posted 2/26/13)

Land Loans
Determining LTV for Cash-out refinance. (originally posted 1/15/13)
Construction loan to purchase land? (originally posted 1/15/13)
Hazard Insurance for “tear-down” property purchase. (originally posted 1/15/13)

Non-Conforming Properties
Purchasing Property with Substantial Deferred Maintenance. (originally posted 10/9/13)
Non-conforming 2-unit property. (originally posted 9/5/12)
Legal non-conforming 2-unit property. (originally posted 9/5/12)

Seasoning and Title
Situations involving seasoning and title concerns that could arise. (originally posted 8/20/13)

Short-term Financing
Specialty property listed for sale. (originally posted 8/21/12)


 

Financing Farm Property

Question:
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?

Answer:
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 dwelling exists on the property, then we will not take into consideration 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 deal 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 for these types of transactions to borrowers who have owned their farm properties for a while and want to refinance into a lower rate/payment or get cash out.


 

Bridge Loan Basics

Question:
How do you calculate combined loan-to-value (CLTV), if you are securing two properties?

Answer:
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 = $900,000 Combined Lien = 50% CLTV
           $1,000,000 Property A + $800,000 Property B         $1,800,000 Combined Value


Question:
What happens when their current property sells?

Answer:
When their current property sells, we expect the borrower to apply the new 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 the borrower 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.

Question:
My borrower 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?

Answer:
Yes, if the borrower 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 above, we could increase our loan to about $875,000 to cover payments and closing costs for the borrower. The CLTV would still be only 54.17%.


 

Construction Loans

Question:
What do I need for a construction loan?

Answer:
Here’s a checklist you can use when getting construction financing for your clients:

  • Bond. The bond insures completion of the project for the homeowner and the lender. Most contractors will get a completion bond from a materials supplier (e.g., Honsador or HPM). When purchasing a certain amount of materials from the supplier the bond is provided at no charge. For very large projects your client may need to get a surety bond from an insurance company (must be A-rated or better), which will be an additional cost paid by the borrower.
  • Construction Contract and Specifications. The construction contract identifies the price of the job, the draw schedule, the scope of the contractor’s and homeowner’s obligations plus other items. The specifications will identify what types of materials will be used for the job and what allowance limits are set for various items (such as fixtures).
  • Plans. We can work with an initial set of plans for ordering the appraisal if the borrower does not make any changes to the plans. The final plans must be consistent with the plans the appraiser used and must have an official approval stamp by the State of Hawaii Department of Planning and Permitting office.
  • Permit. This should be provided hand-in-hand with the final approved plans and must be submitted to Finance Factors before loan closing.
  • Licensed General Contractor. A licensed general contractor is required for all construction loans. We will not accept an owner-builder or a “construction supervisor”. The only owner-builder loan we will consider is where the owner-builder is also a licensed general contractor.
  • Inspections. At each draw from the construction contract, we require the appraiser to inspect the project to insure compliance with the plans and the draw schedule before releasing funds to the bonding company to pay the contractor. For construction contracts in excess of $450,000 we require an engineer or architect to do the inspections.

 

Home Equity Line of Credit

Question:
What are some of the benefits of a Home Equity Line of Credit (HELOC) for someone brokering a loan to Finance Factors? Am I missing out on ways to do more business and close difficult loans?

Answer:
Most of us are so focused on traditional first mortgages and meeting conforming underwriting requirements that it is easy to forget how a HELOC can help us structure a better transaction for the client or save a loan that we were ready to deny.

Here are some creative ways to use a HELOC:

  • Get LOWER Payments Interest-only payments are significantly lower, than comparable amortized payments, and just may save the day if you are struggling with a tight DTI ratio.
  • How much of a difference can an interest-only payment make? Compare a loan for $100,000 at 3.25% with an interest-only payment versus a 30-year amortized payment: $271 per month versus $436 per month, respectively. That’s a difference of $165 per month for every $100,000 borrowed. A $250,000 HELOC would be $412 less per month than a comparable amortized payment in this example.

    If you were pulling cash out of one property to help with the purchase of another, or consolidating bills, do you think that could make a difference in qualifying?

  • Save Time AND Money Use the Tax Assessment Value (TAV) in lieu of an appraisal.
    In most instances we can use a borrower’s TAV in lieu of an appraisal for refinances (except for purchases which require an appraisal). Get up to $250,000, depending on your loan to value (LTV). So instead of waiting 2 weeks for an appraisal and worrying about value and other surprises, go with the TAV HELOC.
  • A Cash Out That’s E-Z Investor cash-out loans can carry a hefty pricing add-on and can be a big deterrent to a borrower when they refinance, especially if the cash-out portion is relatively small.
    Consider doing a rate and term refinance first, then having the borrower apply for a HELOC to pull equity out of a property. This is one way to give your client better pricing and the cash out that they need.
  • Get a LARGER HELOC Cross-collateralize more than one property.
    Because Finance Factors is one of the very few companies that will secure multiple properties on a single loan, your client can get a much larger line by using two or more properties as collateral.
  • Bigger IS better Get a HELOC up to $500,000 without an exception.
    Many foreign investors and other high-end borrowers buy their properties for cash since there are not as many sources for jumbo loans. We have made many large cash-out HELOCs to both U.S. and foreign investors and second home owners to help them recoup some of the cash that they used on their purchase. Need more? Call to discuss exceptions above $500,000.

 

HELOC for Foreign Investor

Question:
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?

Answer:
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 need U.S. credit nor U.S. income documentation. We do require that the client provide income documentation showing her ability to pay (we may need assistance in translating any income documentation provided in a foreign language). The key is that the loan-to-value ratio (LTV) does not exceed 65%. Depending on other risk factors, we may need to reduce the LTV even further.

Additionally, due to challenges that may arise with clients residing internationally, we also require that the customer designate a “personal 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.


 

Portfolio Loans and Unique Underwriting

Question:
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?

Answer:
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.


 

Determining LTV for Cash-out refinance.

Question:
If my client got a good deal on a land loan purchase from a foreclosure 8 months ago, can I use the current appraised value instead of the purchase price in determining LTV for a cash-out refinance?

Answer:
No, for any purchase that was consummated within 12 months of the loan application date, we will use the lesser of appraisal or purchase price.


 

Construction loan to purchase land?

Question:
Instead of a land loan, can the borrower do a construction loan to purchase the land and then build?

Answer:
While it is possible, it is very rare to do a construction loan when the borrower 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.


 

Hazard Insurance for “tear-down” property purchase.

Question:
Do I need hazard insurance if my borrower is getting a land loan to purchase a “tear-down” property?

Answer:
If the appraiser excludes the value of the improvements when appraising a “tear-down”, we have the discretion to waive the otherwise standard 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.


 

Purchasing Property with Substantial Deferred Maintenance.

Question:
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?

Answer:
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.

Question:
My customer wants to purchase a 2-story single family dwelling in Kailua-Kona. 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?

Answer:
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, but we would probably reduce LTV to 70% or less, depending on the overall condition of the property and the strength of the borrowers. We would probably use existing rental contracts and/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.

Question:
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?

Answer:
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.


 

Situations involving seasoning and title concerns that could arise.


Here are typical situations, involving seasoning or other title issues that emerge:

  • Cash out after a change in title.
    We can do these loans immediately. The only issue is if the loan involved a purchase, we will use the lesser of purchase price or appraisal as property value. An exception would be made in situations where the borrowers did substantial improvements to the property that can be well-documented and the borrower is recouping their investment.

  • Non-carryover borrowers on a refinance.
    We have no stipulation that will prevent us from doing a refinance where none of the borrowers on the previous mortgage are on our new refinance mortgage. We will evaluate the story behind the change in borrowers to make sure that there is no fraud or other deceptive practice occurring.

  • Irrevocable trust.
    Typically, once the settlor of a trust passes away, the trust becomes irrevocable. Most lenders cannot make a loan on a property where title is held in an irrevocable trust. Finance Factors, on the other hand has made many loans with an irrevocable trust as the owner of a property. The key factor is that the proceeds are for the benefit of the trust, and we received approval from our attorney who has reviewed the trust documents.

  • Entities on title.
    It is very common for sophisticated investors with multiple properties to hold title in an LLC. Most lenders will not lend on a property where title is held by a corporation, partnership or LLC, but at Finance Factors, we have made such loans on investor properties. We can even have the LLC be on the Note as long as we have a natural person as a guarantor or co-borrower.

  • Life Estate.
    These situations usually occur when a parent transfers title to one of their children. As a safeguard against the child selling the property or doing something with the property against the wishes of the parent, the parent will establish a life estate interest in the property, which means that the child cannot lien or sell the property without the life estate party (the parent) signing the paperwork as well.


  •  

    Specialty property listed for sale.

    Question:
    I have a customer who is a contractor/developer that built a high-end home for cash on Kauai 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 the customer has been working on this project for the past 2 years. What can Finance Factors offer?

    Answer:
    Since this is an investment property, Finance Factors can offer the customer a 12-month 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. We would base pricing off of our bridge loan program and would not exceed 70% LTV, which is not a problem in this case.


     

    *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.