How a Hard Money Lender Saved Our Real Estate Transaction
My husband and I recently had the privilege of a hard money lender helping finance the buyer in our real estate transaction.
We had recently purchased a no perc lot. For those not familiar with this term, it means that the soils on the property did not have a standard absorption rate for a standard septic system. The lot, in fact, required a winter percolation test, which requires very specific standards. Fortunately, the lot passed the winter perc test, allowing us to put the lot on the market for a higher sum of money.
Re-listing the lot during the summer was a key move on our part. We wanted to attract tourists to a beach area that was renowned for having excellent salmon fishing, watching the ferries and beach combing. We finally received an excellent offer; however, the buyer could not qualify for a standard land loan.
The buyer had a credit score of 699, which seems reasonable. Today’s market has made it far more difficult for buyers to obtain loans. The credit report listed that the buyer had an “excessive obligations in relation to income” and a “non-conforming credit score.” No banks would lend to the buyer.
Fortunately, since the buyer had a down payment of $6,000 in the bank, a hard money lender was readily available to loan at a competitive interest rate. As a direct lender, the lender was able to waive the credit report and focus mainly on the profitability of the land itself. The buyer was able to obtain terms that will allow for full payment of the land within two years.
There are stipulations that were required to protect the hard money lender during this process. First, the buyer cannot build until the debt is paid off. This provides them with greater peace of mind in case the loan is recalled, making the process simpler in the event of a foreclosure. Second, payments are due monthly and if not received, the property can be foreclosed on. This provides the buyer with greater incentive to pay mortgage payments promptly and on time.
My husband and I, on the other hand, are relieved to have a direct lender exist in today’s difficult banking economy. Without the assistance of hard money lenders, we may not have had the opportunity to sell our investment property. This now provides us with the opportunity to look for other investments or investment the money in current investments.
Land loans are especially subject to critical scrutiny in today’s mortgage industry. Not only are land loans difficult to obtain, so are construction loans. Banks require high credit scores, are critical of home inspections, require substantial paperwork and often underwriters call for unnecessary items to be completed before closing can proceed. Many of these items may cause deals to fall apart, causing both buyers and sellers to feel frustrated and empty-handed.