Alternative Loan Products

Real Estate world is as complex as one can imagine it to be. Variety of different types of properties with different zonings and uses along with numerous different types of borrowers, individuals, entities, trusts, and on top of it all, with different types and sources of income, self-employed, commission earners, wage earners and it goes on and on, all have yielded to offering of multitude of different loan products by lender to accommodate the need on the market. Not every lender offers all the products.  Depending on their risk tolerance and return on investment objectives, lenders pick and choose what to offer and at what price.  Here is a summary of what is commonly offered in the residential lending industry.

Traditional Full Doc loans

These products are for individuals who earn sufficient income to qualify for the requested loan amount and their income may be documented by tax returns, W2s, pay-stubs and other legal income documents. These types of loans require the least amount of down payment (or equity if refinance) and are offered with the lowest interest rates and fees adjusted for other risk factors such as credit scores, the amount of down payment, property and occupancy type, etc.  Lenders offering these products are often institutional banks and mortgage bankers, are highly regulated and don’t have much flexibility to deviate from their underwriting guidelines.  Wage earners and salaried people with simple tax returns are the typical users of these loan products.

Loan products offered to borrowers with qualification challenges on income, down payment, credit and other issues are referred to as Alternative Loan Products and below are a few:

1. Bank Statement Loans 
   

   These products are designed for borrowers with sufficient cashflow through their bank accounts but not enough reported on their tax returns, typically self-employed and commission earners.  Lenders use a factor as a percentage of the average monthly deposits in the borrower’s bank account averaged over 12 or 24 months as their income for the requested loan. The percentage differs from one industry to another. These products are also offered by institutional lenders, but their underwriting seems to be a bit less stringent on income calculation for such loans. A couple of justifying reasons are that they require more down payment and they are pricier too, less risk and more income. Why not?

    

    

2. Private Money Loans 
   

   These products are often offered by non-institutional lenders such as private investors with private funds. If a borrower does not fit the mold for a typical institutional loan product, private money loans are a good alternative. Interest rates are usually from 2 to 3 percent to as high 4 to 5 percent higher than that of a conventional loan and the fees are higher too.  Typical borrowers using such products are investors, self-employed people with short history, and people with big down payments and not enough income.  Most borrowers use these products for a short term towards an investment with a promise for a much higher return than the cost of the loan, much, much higher. The process to obtain these loans is usually shorter than a typical conventional loan, as there is less bureaucracy within the lending organization.

    

    

3. Hard Money Loans

    

   The name hard money is a reflection on the cost of the loan meaning it is expensive and hard to endure. Although they’re expensive, usually with the rates in double digit figures in current market and fees upwards of 4% to 5%, they do offer a solution on myriad of challenging situations. They are almost always equity driven, meaning with sufficient down payment (loan to values not exceeding 60%), they fund the loan without regards to borrower’s credit, income, or employment history.  People using these products are either desperate or are investing in a screaming deal that they can not pass on it.  These lenders take a 2^nd or 3^rd position, loan to foreign nationals, don’t have a minimum or a very low minimum credit score requirement and loan on almost all kinds of real estate.

    

There are many other loan products for all sorts of properties and borrowers with or without challenges.

Should you be interest in a mortgage, we have mortgage professionals listed on M&M Expert Panel under the money column. Additional lenders and lending services maybe found in M&M Business Partners. For free real estate and mortgage consulting, write to [email protected]