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徐天媺 May Xu
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新泽西州华人贷款专员 New Jersey Chinese Loan officer |
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(201) 710-7986
may.xu@mldmortgage.com |
Senior Mortgage Officer
Mortgage Lending Direct, Inc. NMLS # 588977 |
Loan Characteristics and Their Effect on Your Prospective Investment Project
Most real estate investors acquire income properties by obtaining a loan. As you are probably aware, maximizing loan funds (or OPM—Other People’s Money) maximizes leverage and, thus, maximizes returns. The right loan product can easily make or break a real estate investment deal. As such, exploring various loan characteristics is more than warranted.
Lender Recourse Regarding lender recourse, loans fall under one of two broad categories: “recourse” or “non-recourse.” The former refers to loan products that require the borrower to accept personal liability for the repayment of a loan. The latter, however, is a loan for which the borrower is not personally liable; if the borrower defaults, the lender’s only “recourse” is to seize the collateral—the property in the case of real estate.
This is important because not every investor will qualify for a recourse loan. Likewise, an investor might only qualify for a limited amount of loan dollars that may prevent him from obtaining the money necessary for a particular property. This investor may be able to secure a non-recourse loan and the coveted property in the process. Keep in mind, however, that non-recourse loans are not only much rarer than recourse loans, they also take much longer to secure since the lender thoroughly inspects (read: qualifies) the subject property.
Prepayment Penalty A pre-payment penalty is a fee that must be paid to the lender if the borrower prepays a loan within a certain time frame. Lenders do this to guarantee some specific yield on the loan they are making. Prepayment penalties can be “soft” or “hard”. A lender offering a “soft” prepayment penalty allows the loan to be paid off without penalty if the property changes ownership, but applies the penalty if the loan is refinanced. A “hard” prepayment penalty will kick in regardless of the source of repayment.
It is crucial for the real estate investor to understand the specific terms of the prepayment penalty because it directly affects the investor’s exit strategy and return. Be sure to take the prepayment penalty into account when performing your analysis.
Loan Assumability If a loan agreement includes a “due on sale” clause, the associated loan is referred to as a “non-assumable” loan. An “assumable” loan, on the other hand, does not carry a “due on sale” clause. Once again, the assumabilty of a loan affects the investor’s exit strategy. After all, a low-interest, assumable loan is much more attractive to potential buyers than a property with existing financing that must be paid off upon the property’s sale.
Fees and Costs This one is fairly obvious, but don’t forget to take it into account since it directly impacts your initial investment. These also vary greatly from lender to lender and loan product to loan product. As a rule of thumb: the more unique the loan, the higher it’s associated fees and costs.
Loan-to-Value Ratio (LTV)
The Loan-to-Value Ratio (LTV) is determined by dividing the loan amount by the sales price or appraised value, typically expressed as a percentage. Thus, a building purchased for $2,000,000 with a $1,600,000 loan has a LTV of 80%. Loan products may offer a maximum LTV from anywhere within the range of 70-85%. This ratio is extremely important to investors because the higher a loan product’s LTV, the less an investor’s capital outlay. Thus, the investor increases his leverage and his potential returns as the maximum LTV increases. Of course, when considering LTV, a limiting factor is often the…
Amortization Period
A loan’s amortization period is the length of time required to repay an entire mortgage. This period is typically between 15 and 30 years; however, loan products exist with amortization periods as long as 40 years. For a given loan amount, as the amortization period increases, the lower the required periodic payment. Thus, yearly debt service decreases and cash flow shoots up. Similarly, for a given DSCR, as the amortization period increases, an investor qualifies for more loan dollars. More loan dollars means more leverage and, potentially, greater returns! Consider long amortizationperiods as you search for the perfect loan.
--- Source from <The bigger pockets>
Lender Recourse Regarding lender recourse, loans fall under one of two broad categories: “recourse” or “non-recourse.” The former refers to loan products that require the borrower to accept personal liability for the repayment of a loan. The latter, however, is a loan for which the borrower is not personally liable; if the borrower defaults, the lender’s only “recourse” is to seize the collateral—the property in the case of real estate.
This is important because not every investor will qualify for a recourse loan. Likewise, an investor might only qualify for a limited amount of loan dollars that may prevent him from obtaining the money necessary for a particular property. This investor may be able to secure a non-recourse loan and the coveted property in the process. Keep in mind, however, that non-recourse loans are not only much rarer than recourse loans, they also take much longer to secure since the lender thoroughly inspects (read: qualifies) the subject property.
Prepayment Penalty A pre-payment penalty is a fee that must be paid to the lender if the borrower prepays a loan within a certain time frame. Lenders do this to guarantee some specific yield on the loan they are making. Prepayment penalties can be “soft” or “hard”. A lender offering a “soft” prepayment penalty allows the loan to be paid off without penalty if the property changes ownership, but applies the penalty if the loan is refinanced. A “hard” prepayment penalty will kick in regardless of the source of repayment.
It is crucial for the real estate investor to understand the specific terms of the prepayment penalty because it directly affects the investor’s exit strategy and return. Be sure to take the prepayment penalty into account when performing your analysis.
Loan Assumability If a loan agreement includes a “due on sale” clause, the associated loan is referred to as a “non-assumable” loan. An “assumable” loan, on the other hand, does not carry a “due on sale” clause. Once again, the assumabilty of a loan affects the investor’s exit strategy. After all, a low-interest, assumable loan is much more attractive to potential buyers than a property with existing financing that must be paid off upon the property’s sale.
Fees and Costs This one is fairly obvious, but don’t forget to take it into account since it directly impacts your initial investment. These also vary greatly from lender to lender and loan product to loan product. As a rule of thumb: the more unique the loan, the higher it’s associated fees and costs.
Loan-to-Value Ratio (LTV)
The Loan-to-Value Ratio (LTV) is determined by dividing the loan amount by the sales price or appraised value, typically expressed as a percentage. Thus, a building purchased for $2,000,000 with a $1,600,000 loan has a LTV of 80%. Loan products may offer a maximum LTV from anywhere within the range of 70-85%. This ratio is extremely important to investors because the higher a loan product’s LTV, the less an investor’s capital outlay. Thus, the investor increases his leverage and his potential returns as the maximum LTV increases. Of course, when considering LTV, a limiting factor is often the…
Amortization Period
A loan’s amortization period is the length of time required to repay an entire mortgage. This period is typically between 15 and 30 years; however, loan products exist with amortization periods as long as 40 years. For a given loan amount, as the amortization period increases, the lower the required periodic payment. Thus, yearly debt service decreases and cash flow shoots up. Similarly, for a given DSCR, as the amortization period increases, an investor qualifies for more loan dollars. More loan dollars means more leverage and, potentially, greater returns! Consider long amortizationperiods as you search for the perfect loan.
--- Source from <The bigger pockets>