Summary:
Financial services providers have extensive networks of clients.
Financial services providers, such as accountants, enrolled agents, financial planners, insurance providers, stockbrokers, real estate agents, loan agents, lawyers, and escrow agents, play a pivotal role in the economic ecosystem. Their unique and invaluable expertise makes them an integral part of the industry.
They provide an excellent referral base due to their extensive network of clients.
A salesperson may multiply their market share by developing relationships with these professionals.
Article:
Understanding the various loan types is crucial for a financial services provider. It enables them to leverage their network of relationships as a referral source, empowering them to deliver the best possible solutions for their clients.
Their clients may need a loan broker's services:
Institutional long-term loans with a bank or a quasi-government agency like Fannie Mae
Securitized loans enable borrowers to obtain a longer-term loan with less stringent underwriting requirements. These are generally called non-qualified mortgages (non-QMs)
Other securitized loans in the commercial mortgage space, where a company has an extensive line of credit, fill it up with loans, then sell the loans to a purchaser, such as a life insurance company.
The last option is private money loans originated by mortgage brokers and funded by private party investors. These loans offer a high degree of flexibility, catering to a wide range of borrower needs and financial situations.
Their clients may have capital to invest and want to get involved in purchasing trust deed investments for the superior annualized yield.
Their clients who own real estate may need a source of financing when their bank says "no." Private-party investors with capital to lend will invest in the loan as lenders, expecting a reasonable yield or return on their investment. A borrower will offer the security of their real property through a recorded trust deed. Investors will lend money and receive a promissory note and a deed of trust as security to be held in personal possession. Typically, private money loans are relatively short-term, lasting under 5 years, whereas borrowers often need time to improve their financial position before obtaining a bank loan.
Brokers specializing in real estate-secured loans are a source of private money loans. They solicit borrowers needing loans and private investors with capital to lend. A prospective borrower is prequalified to determine whether they have verifiable equity in real property. If the borrower requests a loan, a due diligence process is initiated to compile a comprehensive package containing adequate documentation to present to private investors. This is done to assist the prospective investor in making an informed investment decision.
Reasons that borrowers prefer loans from private sources rather than banks may include the following:
Excessive hassle and frustration created by regulated bank institutions
Private money loans offer a significant advantage in speed, with some transactions closing in as little as a week or two. This rapid timeline is often impossible with traditional bank loans, providing borrowers with a quick and efficient financing option.
Borrower credit problems such as payment history, unverifiable income stream, old foreclosures, write-downs, bankruptcy, divorce, judgment liens,
Partnership breakdowns or dissolutions, tax liens, poor debt-coverage ratios
Property Condition-disrepair, excess vacancy, partially complete, fix-and-flips, ground-up construction, entitlements in process
Cashouts and subordinate financing are acceptable. Subordinate funding refers to a second mortgage or other junior lien on a property, not the primary loan, but in a subordinate recorded position. A Junior Lien can be a helpful option for borrowers who need additional funds but want to keep their first mortgage.
Business purpose: growth capital to improve financial condition
Mortgage brokers serve as intermediaries, soliciting, qualifying, processing, and underwriting loan transactions. When a private investor funds the loan, the broker arranges for proper documentation and handles the closing process. Upon funding and closing the loan transaction, the broker usually becomes the servicing agent on behalf of the private money investor.
A thorough due diligence process is completed to create a package of material disclosures that benefit both the borrower and the prospective investor. This meticulous process, involving several steps, is designed to ensure the viability and security of the investment, instilling confidence in the lending process.
Could you please complete a loan summary that explains the proposed transaction, including the loan-to-value ratio, collateral property, reason for borrowing, borrower's ability to repay, and an explanation of the investor yield?
Appraisal of real property from an independent, certified appraiser.
The borrower has completed a loan application, with the purpose of the loan clearly explained.
Credit report
Escrow instructions and loan documents completed, including borrower mortgage loan disclosure statement, with an itemization of estimated borrower cost; lender's instructions, promissory note, deed of trust, and related loan documents
Preliminary title report
Financing options are not limited to specific property types. Whether it's a single-family home, commercial space, industrial property, apartment complex, or vacant infill lot, loans are available to suit your needs. However, I would like to point out that loans should be made for business purposes rather than consumer purposes.
Consumer vs Business Purpose:
What is a consumer-purpose and a business-purpose real estate loan?
Consumer-purpose loans are made to natural persons for 1 to 4 residential units of real property, where the loan proceeds are primarily used for consumer purposes --namely, personal, family, and household needs. In contrast, a business-purpose loan is a type of loan where the proceeds are primarily used for business purposes, such as investment or operating expenses. In simpler terms, a consumer-purpose loan is intended for personal use, whereas a business-purpose loan is designed for business-related activities.
"Primarily" means greater than 50% of the net proceeds.
When borrowers seek a loan, they may find a lender who only offers business-purpose loans. In such cases, borrowers often construct a narrative to justify their loan as having a "business purpose." Whether the narrative is legitimate or not, proper documentation ensures a secure and transparent lending process, instilling confidence.
Brokers will consider first- and second-position loans, with loan-to-value ratios generally at 65% or less, ensuring a minimum of 35% protective equity in the event of borrower default.
Investor yields range from 9 to 12% annually, with interest paid from the borrower's monthly loan payment.
This helps you to navigate the world of private money financing.