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Archive for the ‘Second Mortgages’ Category

Vendor Take Back Mortgages – Take Back – 2nd Mortgages

Saturday, September 11th, 2010

Transcript of Video Blog:

Hi, everyone. I want to talk today about something — I haven’t done a blog post for quite a while — and that’s vendor take-back mortgages. What is a vendor take-back, and when does it apply?

A vendor take-back is essentially a situation when the vendor agrees to take back a mortgage in lieu of some cash. I’m going to give you a really clear basic example, but then I’m going to show you what everybody always wants and why it rarely works in Canada. It works in the United States quite smashingly, but it doesn’t work so great up here north of the border.

So, a vendor take-back: if you assumed that a guy wanted to buy a piece of property that was $400,000 but he didn’t really have a down payment, what he could do is go to that vendor and say, “Listen, what I’m going to do is I’m going to get $20,000 from someone over here. Will you carry the balance of the mortgage?” meaning, will you loan me the money and take the property as security?

Now not all sellers are going to be willing to do this. First off, they’re going to want an interest rate, probably higher than the bank’s, to make this worth their time. Secondly, they have to not need those dollars to go buy something else because they haven’t received them from you. You borrowed it from them.

That’s a standard vendor take-back situation. I’m dealing with a guy out in the country right now who bought a house with a massive shop on a huge piece of acreage. The banks didn’t want to finance it because the house is old and rundown, and he was buying it purely for an 8,000 or 10,000 square foot shop that was on it that was wired up for his business. For him, it made great sense.

The vendor was an old guy. The vendor agreed to lend him 100% of the purchase price. Great, he can do whatever he wants, but he’s got to pay that guy the interest. Eventually, as he accumulates money from running his business, he’s going to have to get a mortgage from somewhere to pay that guy out, because that guy’s going to eventually want the dollars.

But here’s the situation we run into frequently where people think a vendor take-back would work. They know they need to get 20% to buy a rental property, so what they say is, “Well, why don’t I put 10% that I have down, and then the vendor gives me 10%, and then we get the other 80% from the bank?”

The reality is that banks generally don’t go for this setup. They don’t want to see vendor take-backs, because if they do, they now have to factor in that payment and can the person afford the vendor take-back payment, the mortgage payment, plus any other debt payments.

If they can, great. Then there might be something we can do. But in the 10 years that I’ve been doing mortgages and banking, I’ve never seen that situation once. So you generally need 20% of your own equity before a vendor take-back becomes an option.

Now you say, “Look, I’ve got 20%. What do I need the vendor take-back for?” Still, 80% is still a pretty high amount of financing, and if your property’s unique or your situation’s difficult with credit or income, maybe you’re going to need 35%. So you’ve got 20; you need 35. Where’s the 15 come from?

That’s a circumstance where a vendor take-back might make sense, and it may be a situation where we can use it. But I need to look at the situation as a whole, because the property, the source of your down payment, and your income and credit all form a very integral piece of the puzzle, and we’ve got to look at that together.

From the Mortgage Centre, I’m Rowan Smith.

Private Mortgages / 2nd Mortgages – What is Private Money

Thursday, September 9th, 2010

Transcription of Video Blog:

Hi, everyone. It’s Rowan Smith from The Mortgage Centre. I’m here today to talk about private mortgages, private money. What is it, when do you want to use them?

Well, private mortgages are really just that. It’s a mortgage funding and financing that is set up by a private individual or a corporation. Now, these are not financial institutions. This could be somebody who is just very wealthy and is looking to lend a friend or family member money, or it could be someone who just has a bunch of funds sitting around and wants to earn a return that is greater than they can earn at the bank.

So, with a private mortgage like that, the borrower would usually have to go through the broker or they have to know the lender directly and approach them and get the mortgage set up. Now, why would you do this? You’re going to face higher rates than the bank; you’re going to face fees for sure, so why do borrowers do it?

In most cases it’s because they can’t qualify under traditional guidelines. Maybe they’re in the midst of a divorce. Maybe they’re in the middle of a career change. Maybe they’re currently unemployed and just need to use some of that equity that they’ve built up in the property, to get them through until their new job starts.

There are a lot of very legitimate reasons why people need private money, and very legitimate reasons why the banks won’t give them the loans under the circumstances. If you’re in one of these situations, private mortgages might be the way to go.

I have a lot of private lenders ranging from very wealthy people to very large mortgage investment corporations, that can look at your situation and will make more sense, than perhaps your bank who is looking to have you fit within the bank box.

So, if you know somebody who is in a tough situation and needs access to funds, I can help them.

From The Mortgage Centre, it’s Rowan Smith.

Private Lender Fees Too High? Talk to me!

Thursday, July 8th, 2010

Transcript of Video:

Hi everybody. It’s Rowan Smith with The Mortgage Centre. I heard something today that made me angry enough I had to come and do a blog post on it, and it has to do with lender fees.

Many times when we’re doing a mortgage for residential purchase or refinance or something like that, there are no fees. Most times, I would say most transactions there are never broker fees.

The only time that broker fees apply tends to be when either there’s an extraordinary amount of work that has to go into it-far and above what would be normally asked. I’ve never levied that in my career. Alternatively, it can be when you’re doing some private lending. The reason is private lenders do not pay the brokers.

Now, what’s making me upset was that we’ve sort of gone back to the old days of cowboy financing. What I typically will see in a private mortgage if someone doesn’t qualify under bank guidelines but they’d still like to raise some financing, they’d get a first mortgage. Maybe they have a big down payment. It’s called 25 percent.

They go to a lender. They get a rate of… I’m just grabbing numbers here. Nine percent, let’s say, and they were going to pay a three percent fee. Well, that fee typically will be divided up between the lender and the broker. So the broker would be getting some of the three percent, and the lender will be getting the balance.

Now, what’s sort of happening is we’ve started to see a trend where brokers are calling the lenders and saying, “Listen, will you charge the client a slightly higher rate and take one percent fee, and I’ll take four?”

Now, on a small mortgage where it’s maybe $50,000, it’s not a tremendous amount of money. But a lot of times these large first mortgages are being done on properties that someone’s going to buy and flip. Maybe they don’t qualify under normal guidelines. But they have good income. Or maybe they’ve got money offshore or what not.

Four percent on some of these mortgages is outrageous. And brokers who are charging these fees shouldn’t be allowed to get away with it. I don’t know how they get their clients. I certainly don’t know how they keep their clients. But I know that I’m out there looking to eat their lunch.

If you know anybody that’s being told they have to pay a five percent fee on their mortgage, and as long as the mortgage is excess of what, $100,000. That becomes a very large chunk of change, a very big piece of money that someone’s making on one transaction. Those transactions are no more difficult than a straightforward bank transaction that they’re doing. In fact, they’re oftentimes less difficult because the broker doesn’t have to document the file the way they would with a bank.

Anybody paying those types of fees please call me. It’s Rowan Smith from The Mortgage Centre.

Private Lending – When It Applies and When it Doesn’t

Wednesday, July 7th, 2010

I have taken a LOT of calls on private lending recently, and I figured it was time to do a new post on the topic and explain when it does and does not apply.

Transcript of Video Blog:

Hey everybody, Rowan Smith from the Mortgage Center.

I want to talk to you about private lending. There’s a lot of confusion as to where it is. People will often say to me, “I tried to get five percent down with my bank, but I couldn’t document my income . So I was wondering if you have any private lenders.” And the answer is, with five percent down, “No.”

Private lending is restricted, generally, on the strength of the property and the size of your down payment. Now, sure, credit and income play a role; they want to make sure you know how to pay your bills and they want to make sure you have income. But they may not seek to verify it in exactly the same fashion that the banks will.

Many times, they won’t look at it at all. They’ll assume that if you’re stoking down 30 percent or 40 percent of the property’s value and if you have payments of $1,500 a month, that you would be a fool to do so if you didn’t have a means of making those payments, that’s equity lending.

And equity lending is really based on the quality of security, it’s proximity to major arterial routes, to urban centers, to schools, et cetera, et cetera, et cetera, predominately focused on resale value. So, if you’re buying a unique property up in the Coot Knees, and you’re trying to get 95 percent financing. If the banks won’t do it, FC and HC won’t do it, you’re not going to get it from a private lender outside of the bank of mom and dad.

Now, in cases where private lending is required, someone with poor credit, maybe their credit is below what the bank’s threshold is. And, maybe they have a large down payment. A classic example of this is someone who’s gone through a bankruptcy, who owns a business and maybe still makes very good money but, due to one reason or another, was forced to declare bankruptcy and they’ve got 30 percent down. And they’re trying to buy a place and they’re being told everywhere, “No way, we can’t due to credit.”

That’s a perfect candidate for private lending and usually they can get some reasonable rates in those circumstances assuming the property is, again, solid and secure because that’s kind of the backbone of private lending.

Another thing, is if the property doesn’t conform to standard uses. For example, a former grow op or former meth lab, or land-only on service lots, and that kind of thing. These are places where banks don’t really like to lend, at least not at the four percent range or five percent range, but that’s still good business and those properties still have value. So, if you’re a borrower looking to get some sort of land loan or a former grow op financing so you can fix it and sell it for a large profit, those are definitely the ones that we can help you.

Lastly, people that just can’t document their income. Maybe they’ve got fantastic credit. They run a small business and they make good money each year, but due to write-offs and tax-efficient accounting, they’re not able to prove their income. And if the banks don’t believe how much income they’re earning, but they have a sizable down payment, again, we might have to go to private lenders. Not always. We often have equity programs at banks and whatnot, if they have enough of a down payment.

But sometimes, there’s that gap between what the banks will do on an equity basis and between what they will do on a stated income or full income basis. And, in that gap, is where private lenders tend to make their money.

Lastly, weird situations. So, banks will often demand independent legal advice for a spouse buying a home without the other spouse on title or maybe you’re trying to do an equity takeout for investment purposes in another property. The numbers don’t quite jive because the banks don’t give you credit for your rental income the way that they used to. These are all perfect examples of places where private lending is required.

A common one is also construction or buy, fix and flip. These are places where you can use a private lender who’s not going to ask you a billion and one questions like the banks are going to ask you. I can make the process a lot easier.

Now, in exchange for all of this freedom, in exchange for all these abilities, you’re going to pay a higher rate. So, if the banks are charging four percent, you’re probably on a first mortgage looking anywhere from 6-1/2 to 12, depending on the risk that you pose as a borrower and that the property poses as security to the lender.

Now, there’s also second mortgages, third and so on and so forth, maybe you don’t want to break your first mortgage because you’ve got a fantastic rate on it, but you need 20 grand to consolidate some credit card debt and get the creditors off your back. These are all ideal things for private lending.

If you have a situation that doesn’t fit the bank, but you’ve got some equity and, generally, you need about 20 percent equity in the property, or 20 percent down for private lending to be considered effective, then please give me a call.

For the Mortgage Center, I’m Rowan Smith.