Frequently Asked Questions
1. Do I need a down payment?
Yes, you will typically need a minimum 30% of the PURCHASE PRICE in cash for a down payment. Borrower needs to have a substantial financial vested interest in the property, especially since the loan being made will be based primarily on equity in the collateral vs being based on an excellent credit history and high FICO scores. The exceptions for not having a 30% down payment would be if borrower were using the ALTERNATIVE 20% down loan program, the 20% down EXCEPTIONS loan program, or you own other property in Arizona with substantial equity to use as cross-collateral as explained in FAQ #10 below.
2. Why do they call it “hard money”, “private money” or “equity loans”?
Loan approval is weighted mostly on the value and borrowers “equity” of the “hard asset” used as collateral with a lesser concern given to the borrower’s credit rating. 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 as they do not have to fulfill the more stringent FDIC and governmental mandated lending requirements of the traditional bank.
3. Interest, Amortization & Interest Only vs. Amortization
I 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 rent you pay. Interest paid on real estate loans is usually tax deductible (consult with your tax advisor). If you make payments with both interest and additional funds to apply toward the principal, this is called an AMORTIZED payment, or AMORTIZATION. Car loans are almost always amortized loans. If a portion of your payment is principal, and you make the same monthly payment, your payments are first applied to the interest or rent on the money still owed, and the rest to principal. Since you only pay interest on the amount of your balance, as you pay down your loan balance with your monthly principal payments (in addition to the interest), less of your monthly payment goes to pay the interest (because every month you owe less) and more of your payment applies to your principal, paying your loan down faster and faster each month. Just like a car loan. After a period of time, you owe nothing; your loan is paid off.
An interest only loan means you only have to pay the interest due each month, BUT you have the option of adding extra funds to your interest payment to be applied to principal which lowers your principal balance, therefore lowering your monthly interest charges. An amortized payment requires you to pay principal as well as your interest each month. In either event, you are only charged interest 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.
4. How do I pre-qualify for a BRAD LOAN?
NO COST to PRE-QUALIFY. Just fill out the loan application and click on “submit”! If you are pre-qualified, and you want to move ahead with the loan process, we will ask you to come to our office to sign the loan application forms and various disclosures. We will need a copy of your purchase contract (if you are under contract), a copy of a bank statement showing the source of your down payment funds. If you are buying the home as an owner occupant, we will also ask for income documentation, such as paystubs, last two years W-2’s, last two years Federal tax returns, or if self employed, last 12 months of bank statements and of course some sort of valid ID. To apply for a loan and get an LSR (Loan Status Report, Realtor talk for a “ loan pre-approval letter”, we do not ask you for any fees or charges at that time. It cost’s you nothing to get pre-approved.
5. 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, I require a $535 non-refundable application fee and a separate check made payable to the appraiser (typically $350 for most single family homes under $200,000). If you choose not to close your loan for any reason, you will forfeit the $535 application fee. Your appraisal fee becomes non-refundable at such time as appraiser commences the appraisal process. Should BRAD choose not to close on your loan, your application fee will be fully refunded to you.
6. 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.
7. 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, preliminary title report and the appraisal. Low doc is when we also ask for all or one of the following: a bank statement. Full doc is when we require, in addition to the previous requirements, 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, and or other proof of income \ employment \ self employment.
8. What is LTV? and ARV?
LTV stands for “Loan to Value”. It is expressed as a percentage of the mortgage size 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. ARV stands for “After Repair Value”, meaning what an appraiser may think a home will be worth after a specific list of repairs and improvements are made.
9. What is CLTV?
CLTV stands for “Combined Loan To Value”. If the purchase price is $100,000, you take out a $60,000 first mortgage, and the Seller provides a $20,000 Seller carry-back, the CLTV or the Combined Loan to Value is an 80% CLTV. You arrive at that figure by adding the total amount of loans, $60,000 + $20,000 = $80,000. Divide the total combined loan amounts, $80,000, by the purchase price of $100,000, and this equals 80, making for a 80% Combined Loan To Value.
10. What is “Cross Collateralization”?
It is 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.
11. 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”.
12. 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.
13. 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 is considered pre-paid interest 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. Sometimes for convenience purposes in quoting fees, the two are combined together and simply referred to as points.
While we do not give tax advice, “points” are usually fully tax deductible as prepaid interest on a purchase. They are usually deductible on a refinance as well, but usually spread out over the term of the loan. Monthly mortgage interest paid is also usually deductible on your taxes as well. Please consult your Tax Advisor on these matters.
14. How Much $ is a “Point”?
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 buying a $100,000 home taking out a $70,000 loan, and there were 3 points origination fee, a 3 points loan discount, 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.
15. What are Administrative fees; Underwriting, Processing, Document Preparation, Lender Inspection?
The administrative fees which total approximately $1800 include the following:
- Underwriting ($495) one of our due diligence functions; reviewing and assessing information about you and the property to determine if the loan is viable. In underwriting we review the purchase contract and any applicable addendums, appraisal, credit report, the flood certification report, the application, back up documentation, all to determine if the loan is an acceptable risk.
- Document Preparation ($395) is the preparation of your loan documents for closing.
- Lender Inspection ($295) 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.
- Loan Application ($535) is gathering all your information and data, discussing your different loan options, evaluating your circumstances, evaluating collateral, and discussing and determining which BRAD LOAN is right for you. It is also to pay for us to obtain a preliminary title report, work with the title company, work through title issues with the escrow officer, work with realtors, insurance agents, appraisers, gathering up borrower’s documentation, etc, and coordination of all the previous mentioned functions and people to help bring your loan to fruition.
Also included in the administrative fees are expenses incurred on your behalf by eMortgage Inc. and/or the lender.
- Wiring fees ($20 to $50) charged by the lenders bank to wire your loan funds to title.
- Credit Report ($18 to $26) fees charged by the credit reporting agency. If we have a current credit report for you on file and you do regular business with us, we will only charge for 1 credit report every 3 months.
- Flood Certification ($10) to determine if your property is in a flood zone and therefore requiring flood insurance, as well as charges from
- Courier services ($30 -$60) shipping documents between lender, title company, and in some cases, the borrower.
16. What are the 3rd Party costs?
You will also have third party costs and expenses which include the following:
- Title Fees which include title insurance, a lender’s policy, eDoc Fees, Courier Fees, Wiring Fees, Document Recording Fees, etc. These fees can vary between $700-$1200 depending on the loan amount and type.
- Loan Servicing Set Up Fees charged by the account servicing agent (typically around $325)
- One year’s prepaid home owners insurance (for homes being bought for $40,000 to $120,000 , insurance seems to run in the $400 to $800 per year range)
- Appraisal fees paid to an appraiser (usually $350 to $450)
- Tax service fee ($85) paid to a title company to keep account servicing up to date on the subject property’s real estate taxes and their status.
- Pre-paid prorated interest (depends on the day of the month you close your deal)
- Initial deposit to the impound account as a cushion toward future real estate taxes and insurance.
The total of these fees can vary between $2300 and $3500 but they are required in almost every loan. The above are an estimated range of fees for loans under $100k. Your actual fees may vary.
17. The BALLOON payment: What happens when my loan comes all due and payable?
Balloon payment means the entire unpaid principal balance plus any unpaid interest and or late fees are all due and payable at one time on a specified date. If your exit strategy in paying off your loan is not by SELLING your PROPERTY, we suggest you contact us AT LEAST 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.
18. 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, or purchase price plus renovation costs. 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.
19. What is “Subordinate” financing and is it allowed?
It would be 2nd position financing behind our 1st position mortgage. For example, you want to buy a $100,000 property with 20% down payment. You might get a BRAD LOAN for $60,000, and the Seller of the property might take a seller carry-back for $20,000, so now you only have to put $20,000 down, since you financed $60,000 plus $20,000 for a total financed of $80,000. In this example, the Seller “subordinated “to the BRAD LOAN first mortgage. Conventional lenders often do not allow this, but the BRAD LOAN does.
20. LOAN SERVICING AGENT: Who keeps track of my payments, maintains my impound account to pay my insurance and taxes when due? Why do lenders usually 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 your impound account to pay the real estate taxes and insurance when due, and forward the interest (and principal if applicable) payment 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. The 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 who would in turn release the lien from your property and forward the payoff funds to the Lender. What if I sell or payoff my loan and there is unspent money in my impound account? Under ordinary circumstances, any unspent funds in your impound account not previously used to pay your insurance and taxes will be refunded to you by the Loan Servicing Agent. This is your money. (In events of foreclosure, Deed in Lieu of Foreclosure, or other default, there may be circumstances where impound balances may be applied toward money owed to the lender).
21. How long do I have to keep my loan? Is there a pre-payment penalty?
With or without a pre-payment penalty, you can pay off your loan at any time by sale, re-finance or cash on hand. Most of our loans have no pre-payment penalty, allowing you to make additional principal paydown payments or pay your loan off at any time without any extra fee. You do not have to keep your loan for the initial stated term. You can pay if off the next day after you get the loan if you want. Contact the Loan Servicing Agent for payoff information. Some loans have a minimum interest guarantee. This means if you have guaranteed the lender four months of interest and you pay your loan off in two months, you will owe in addition to your regular payoff, two additional months of interest.
22. 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 and escrow agent handling your sale transaction contact the Loan Servicing Agent with your account number. Loan Servicing Agent will provide the Title Company with a “payoff” statement, and the Title Company handling your sale transaction uses your sale or re-fi proceeds to pay off your loan to the Loan Servicing Agent, who then releases your lien and forwards the payoff proceeds to the Lender.
23. Do you have loan programs that will help finance renovation costs if I am buying a property in need of substantial renovations?
We have an excellent loan program to roll your renovation costs into your BRAD LOAN. Please refer to the Loan Programs page to learn more about my RENOVATIONS INCLUDED loan program.
24. 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 by the original lender if your note was to be sold to an alternative investor. Never make payments elsewhere unless you are instructed to do so by your original lender.
25. 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 BRAD LOAN. $60,000 BRAD LOAN + 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 3rd party closing costs and loan fees unless the Mortgage Lender or Seller agreed to finance them as well, or perhaps the Seller is paying all or a portion of them.
26. What is “Cash–Out” financing?
It is when you borrow money against a property your already own, whether you own it free and clear, OR are taking out a bigger loan to pay off a smaller loan, OR are taking out a loan for the same amount as the loan you are paying off, perhaps to get better payment terms and or interest rate.
27. Can I hold the property in the name of an LLC or Corporation?
Yes, with Lender approval, provided the principals of the entity sign "a personal guaranty".
28. 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, however would appear on your credit report as it is in the public records).
CALL IF YOUR QUESTIONS ARE STILL NOT ANSWERED OR IF YOU WANT TO LEARN MORE! 480.948.0880 or email your question(s) to brad@bradloans.com
