Financing REO Properties – REO Loans

North Coast Financial offers hard money distressed property loans including REO loans, short sale loans and foreclosure loans to real estate investors in California.

A property may be distressed for a variety of reasons. Pursuing a distressed property can result in acquiring the property for a reduced price but the condition of the property may be in a state that prevents the buyer from obtain conventional bank financing.

Below are some of the situations in which real estate investors decide to pursue distressed property loans from a hard money lender:

REO Financing & Loans

REO stands for “Real Estate Owned” and describes a property which is currently owned by a bank after the property failed to sell at a foreclosure auction.

The REO property must meet FHA minimum property standards in order for the borrower to qualify for a conventional bank loan. Many REO properties are in poor condition and in need of maintenance and repairs. Homeowners going through foreclosure are financially stressed and usually unable to pay for the property’s general upkeep, leading to the further degradation of the property. In some cases the previous owners of the property may leave trash or items that must be removed or even damage the property as they leave.

The majority of REO property is sold “as is” and requests to make repairs will often not be approved. There are many issues that will prevent a property from being FHA approved and must be resolved prior to loan approval. If the needed repairs cannot be made FHA approval will not achieved and the deal with conventional financing will be dead. An REO mortgage is often needed to purchase the REO property if all cash is not available.

REO Lenders

REO lenders such as North Coast Financial are able to look past property condition issues and provide fast funding for the borrower. REO lenders usually require a down payment of at least 25-30% of the purchase price. Significant issues with the property increase the risk to the REO lender which may result in the lender requiring the borrower to contribute an even larger down payment in order to provide financing on REO properties.

Short Sale Financing and Funding

A short sale is when the proceeds from selling a property are less than the liens (loans) against the property. The lien holder(s) must agree to accept less for the property than is owed on the property. Approval for a short sale from the lien holder(s) can take 1-2 months or even as long a year or more. If there is more than one lien holder both will have to approve the short sale, which can complicate things further and increase the time needed for approval.

The uncertainty of the time frame for approval is one reason real estate investors often choose to obtain short sale financing. Short sale financing from a private lender provides the flexibility and speed to fund a loan in a matter of days once short sale approval has been received by the borrower. Once the property has been acquired by the borrower they will be able to refinance to a lower-cost and long term loan if desired.

The fact that the property is a potential short sale increases the likelihood that the property will have issues in need of repair. Short sales are sold “as is” and requests for repairs to be made by the seller will likely not be approved as the seller is already in an unfortunate financial situation. As with REO property, certain problems with the short sale property in need of repair will prevent a conventional lender from providing financing if the property doesn’t meet the FHA minimum property standards. If the needed repairs cannot be made, conventional financing for the purchase of the short sale will not be available.

At this point, the only options would be an all cash offer or a non-FHA loan. Financing REO properties is typically only available from private/hard money lenders. Hard money lenders do not have the same specific property condition requirements and would still be able to provide short sale financing on a property in need of repairs.

Foreclosure Loan

A foreclosure loan can refer to a purchase loan used to acquire a property which has been foreclosed upon or will soon be foreclosed upon. It is similar to a REO loan.

A foreclosure loan can also refer to a refinance loan which is made to a property owner who is currently in danger of losing their property to the foreclosure process. Other terms for this type of loan include stop foreclosure loans, foreclosure refinance and foreclosure bailout loans.

In some situations hard money lenders may be able to provide a foreclosure loan to a property owner in order to stop a foreclosure.

Condition of Property Does Not Qualify for FHA Loan

In a situation where the seller has the property on the market for a traditional sale but the seller is unwilling or unable to make needed repairs to the property, the condition of the property will prevent a conventional lender from providing funds for the purchase if it doesn’t meet Federal Housing Administration (FHA) minimum property standards.

The Federal Housing Administration (FHA) has minimum property standards that must be met in order to qualify.

Defective construction, evidence of continuing settlement, excessive dampness, leakage, decay, termites, environmental hazards, or other conditions affecting the health and safety of occupants, collateral security or structural soundness of the dwelling must render the property ineligible until the defects or conditions have been remedied and the probability of further damage eliminated. Hud.gov

Some common problems that the FHA standards will require to be remedied include:

Roofs and Attics

• Roofing must be in condition to last for at least 2 additional years
• Roofing must keep moisture out
• Attic must be inspected for evidence of potential roof issues
• Roof cannot have more than 3 layers of roofing

Electrical and Heating

• Electrical boxes should not have any exposed or frayed wires
• All habitable rooms must have a functioning heat source

Water Heaters

• Water heaters must meet local building codes
• Water heaters must convey with the property

Asbestos

• A home that contains asbestos that appears to be deteriorating or damages requires further inspection by an asbestos professional

Bathrooms

• Property must have a toilet, shower and sink

Kitchen

• Kitchen must have working kitchen appliances (stove)

Structural Soundness

• Defective structural conditions or any conditions that could lead to future structural damage must be remedied
• Conditions include defective construction, continuing settlement, termite damage, excessive dampness, decay and leakage.

Property Access

• Property must provide adequate and safe access for vehicles and pedestrians.
• Street must have an all-weather surface so emergency vehicles can access property during all weather conditions

If any of these conditions exist and the seller is unable or unwilling to make the needed repairs the buyer will be unable to obtain an FHA conventional loan. Only a cash buyer or borrower with a hard money loan will be able to purchase the property.

Hard money lenders do not have specific minimum property standards but the borrower must have a reasonable plan to remedy all of the issues. The lender will likely require a higher down payment if the property is in very poor condition.

Hard money lenders are able to fund at a much faster rate than conventional lenders. The average time to fund is generally 2 weeks but hard money loans can be funded in as few as 3-5 days if needed.