by: Corey Schwartz

I’m an Investor, What Kind of Loan Can I Get?

Whether the strategy is fix & flip or buy & hold, investors in single-family detached homes, multi-unit residences, condominiums and townhomes have access to a wide variety of loan arrangements from Loanatik. Your strategy to make money from real estate investments will help you determine the type of loan that makes the most sense for you. You might need funds to purchase a home, rehab a property, or both. In this article, we are dealing strictly with investment real estate, not property that you or family members occupy. To better understand your borrowing options, let’s first explore a few fundamental concepts.

Limited Liability Company vs Liability Insurance

If you take out a mortgage on a property to be used either a source of rental income or to flip for a profit, you should always take steps to handle the worst-case scenario – having the property foreclosed because you could not make timely mortgage payments. Two classic safeguards are:

  1. Owning the property through an entity. The entity is frequently a limited liability company (LLC), a limited liability partnership (LLP) or a Chapter C corporation. All of these entities separate their assets from your own. Normally, if your entity defaults on a loan, the lender can only seek the entity’s assets, not your personal ones. However, recourse loans (described below) are vulnerable to lender External entities can also protect your personal property from liability lawsuits associated with the entity.
  2. Liability insurance: This insurance will pay when you are sued in court on a liability issue. For example, if you rent out an apartment in which scalding shower water burns your tenant, a judgment against you will be paid (up to the policy limits) by the insurer. However, liability insurance does not protect you from creditors demanding their money.

Often, real estate investors use liability insurance in combination with external entities to limit liability.

Recourse vs. Nonrecourse Loans

Mortgages are collateralized by the property to which the mortgage loan applies. If you fail to make timely mortgage payments, the lender can foreclose and take the title away from you to sell the property and recoup its loan. However, what if the property is deficient – i.e. it does not fetch sufficient proceeds to pay off the mortgage? In a recourse loan, the lender can come after some or all of your wealth and property to satisfy its debt. Conversely, in a nonrecourse loan, the lender will need to be satisfied with the money recouped from the collateral property alone. Obviously, borrowers favor nonrecourse loans; lenders prefer recourse ones. Bear in mind that nonrecourse loans charge higher interest rates than do recourse ones, due to their riskier nature.

Limited vs Unlimited Recourse Loans

Many recourse loans are secured by one or more identified assets, such as a set amount of cash or other specified properties. If the borrower defaults on a limited recourse loan, the lender can pursue the identified assets, but no other. In an unlimited recourse loan, the lender can attach any asset of the borrower. This is an unusual event (Loanatik has never taken recourse on a loan), but borrowers should understand the implications of the contracts they sign.

Anti-Deficiency Statutes

State laws dictate the ability of a lender to take recourse on a defaulted mortgage and statutes. Jason Cheung, a columnist for LegalMatch, wrote a great article about Anti-Deficiency Statutes in each of the states and figured out that the following states have anti-deficiency laws that limit a lender’s ability to receive any assets other than the collateralized property in cases of foreclosure: Alaska, Arizona, California, Connecticut, Hawaii, Iowa, Minnesota, Montana, Nevada, New Mexico, North Carolina, North Dakota, Oregon, Washington, and Wisconsin.

However, in some of these states, anti-deficiency statutes apply only when the borrower is also the primary resident of the mortgaged property, and therefore would not apply to rental units or to houses you are preparing to flip (and not living in). Also, the statutes usually pertain only to first mortgages. Your real estate agent, lawyer or lender can explain the relevant state laws to you.

Guaranteed Loans

Mortgage loans might be buttressed against default through guarantees and/or insurance. Similar to the limited recourse arrangement we mentioned earlier, a partially or fully guaranteed mortgage is secured by additional assets pledged by the borrower, the lender or by a co-signer. In some deals, co-signers are secondary investors who collect fees for guaranteeing loans.

The government has several programs that insure mortgages for the purchase and/or rehabilitation of eligible properties, primarily single-family homes. One of the most popular among real estate investors is Section 203(k) Rehabilitation Mortgage Insurance, provided by the Federal Housing Administration to insure mortgages for the costs of purchasing or refinancing/rehabilitating homes that are at least one-year-old. If you are buying a home, the mortgage insured by 203(k) is allocated partially to the purchase price and the remainder to rehabilitation costs (which must exceed $5,000). Rehabs can range from cosmetic updates to complete gut jobs, as long as the original foundation is maintained. They also include conversions of single-family homes to multi-unit structures. The total size of the mortgage cannot exceed the FHA limits for your geographic area. The 203(k) program is relatively low cost and is geared toward low-income borrowers. They are a favorite here at Loanatik, and we make a lot of 203(k) insured loans. Some lenders, unlike Loanatik (?), attach extra fees to these loans.

The Limited 203(k) Mortgage Program insures up to $35,000 of the mortgages of homebuyers and homeowners to upgrade, improve or repair their homes. This is especially useful when you are preparing the home for sale. The money can also be used to make properties move-in ready for renters.

A Title 1 Home and Property Improvement Loan program from the Department of Housing and Urban development can be used to insure loans up to $25,000 for the repairs, alterations and site repairs to single- and multi-family structures. Title 1 loans can be used in conjunction with 203(k) loans.

Private Loans

Loanatik makes both insured and private mortgage loans. A private money loan is not insured by a government agency. We offer three main types of private loans to investors:

  1. Single-property loans: Investors can secure a Loanatik single-property loan to purchase, refinance or rehab a property in preparation for renting or resale. It is a great way to build your future, one property at a time. Our interest rates range from 10 to 18 percent. For those investors who buy foreclosed houses at auction, Loanatik offers 18 percent loans with 24-hour funding and a modest $1,000 funding fee paid from loan proceeds, not out-of-pocket. Whether you are a novice or a seasoned veteran, you will appreciate the super-fast approval and funding available from Loanatik. These loans do not require personal income verification, W-2s or tax forms, and you do not have to pay capital gains taxes on refinance Typically, these loans are taken out by LLCs and LLPs.
  2. Portfolio loans: A Loanatik portfolio loan is a great way to consolidate multiple rental property mortgages into a single loan. You then have to make only one mortgage payment a month. The properties within the portfolio cross-collateralize each other, which can reduce your interest rate and even unlock equity for further investments. We even provide an interest-only option. Your loan is based on the cash flows of your property, not on your personal income.
  3. Short-term real estate loans: If you need a fix & flip loan, or a bridge to term loan, we can help! Contact us for detailed information.

The Investors Choice

The chances are that if you want to invest in or refinance a rental property, or fix and flip a home, Loanatik has the perfect product for you. We offer speedy, no obligation quotes on single- and multi-family homes, condos, townhomes, even mobile homes. You can obtain fixed or adjustable rate loans, as well as refi’s (with or without cash out), and interest-only loans. We observe strict privacy rules and encrypt all of your information. We have been accredited by the Better Business Bureau since 7/31/2015 and have achieved an A- rating. The BBB has not received a single complaint about Loanatik, ever.

Don’t wait! Strike while interest rates are still low. If you want to start or grow your real estate investment business, contact us today.

 

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