Summary:

Financial services providers have extensive networks of clients.

Financial services providers, including accountants, enrolled agents, financial planners, insurance providers, stockbrokers, real estate agents, loan agents, lawyers, and escrow agents, bring their unique and invaluable expertise to the table, making them an integral part of the financial ecosystem.

They provide an excellent referral base.

A salesperson may multiply their market share by developing relationships with these professionals.

By working with these professionals, salespeople can multiply their market share and enhance their business.  This is not just a beneficial relationship but a mutually beneficial one, where each party’s contribution is integral to the success of the other, underscoring the importance of financial services providers in the industry.

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 real estate clients may need financing when their bank says no.  That source for real estate loans is called private money or hard money financing. Private-party investors with capital to lend will invest in the loan 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 an addendum trust as security to be held in personal possession.  Typically, money loans are relatively short-term, lasting under 5 years, where borrowers often have time to improve their financial position before obtaining a loan.

Brokers specializing in real estate-secured loans are a source of private money loans.  They solicit borrowers who need loans and private investors with capital to lend.  The 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:

• Regulated bank institutions create excessive hassle and frustration
• Private money loans offer a significant advantage in speed, with some transactions closing in as little as a week or two.  This 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's 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, which is not the primary loan but is recorded in a subordinate 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 typically 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 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, the Borrower's ability to repay, and an explanation of the investor yield?
• Appraisal of real property from an independent, certified appraiser.
• The loan application is completed by the Borrower, who explains the purpose of the loan.
• 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, it’s essential to note 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, including personal, family, and household needs. In contrast, a business-purpose loan uses the proceeds primarily 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.

On the other hand, a business-purpose loan is a type of loan where the proceeds are primarily used for business purposes.

Primarily means more significant 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 for their loan business.  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 11% annually, with interest paid from the Borrower's monthly loan payment.

This helps you to navigate the world of private money financing.