There are some things to be very careful about -- Foreclosures Part 6 B

Here is the remainder of my post I started yesterday:

HARD MONEY

I have briefly mentioned hard money but never really discussed it. Hard money comes from an investor with lots of cash. This “money investor” will loan you money without any qualification process. In other words, he won’t ask where you work, your monthly earnings, what your credit is like, or for your tax returns from the last 2-years. This investor wants to be on the property title as a lien holder. A hard money lender will rarely lend more than 70% of the properties market value. This way the hard money lender can still make money if the property must be sold. You can see what an advantage hard money can be, right? It’s instant money – with no qualifying process -- that allows you pay off the previous lien holders and complete the purchase. Additionally, most hard money loans do not require a monthly payment. The monthly interest will be added to the “loan payoff” and will be satisfied when you sell you Phoenix area property.

Hard money should never be used for a long-term solution because the interest rates are very high. Hard money will be a transitional solution while you prepare the house for resale. The only warning here is to fully understand the interest rate you will pay and the amount of your monthly obligation. Hard money loans are simple interest loans and do not include a principle payment. They can be as high as 18%. If you borrowed $150,000 your monthly obligation would be $2,250. That is derived by multiplying $150,000 X .18 and then dividing by 12-months.

DUE ON SALE CLAUSES

Every mortgage done in the last 10-15 years has one of these clauses. They are designed to protect the interests of the mortgage company. The clause essentially means that the mortgage is “due in full” when the property is sold. In other words, the mortgage company has inserted a clause telling the owner not to let you assume their loan. Does that make it illegal to assume a loan? NO, it’s not illegal … but it is a legal clause. What does that mean? It means you can’t go to jail for assuming a loan, but the mortgage company can make you pay off the loan balance or foreclose on YOU ... if they find out about it. So ... do not let the mortgage company know you are assuming the loan. An experienced title company should know how to do this. However, do not assume they know how to do it – ask them if they know how to do it.

INSURANCE

This TIP only applies if you are “assuming” a loan. The loan you are assuming is required to have a home owner’s insurance policy. The name of the “insured party” on the policy is the person whose house you are buying. The name of the “beneficiary” on the policy is the mortgage company who loaned the money for the property. Where is your name on that policy? It's no where to be found. What happens if a tree falls on your Phoenix area roof? Will you be able to place a claim? The answer is: You cannot place a claim with the policy in it's current state. Here is the REAL ESTATE INSIDER TIP: get the owner to name you as an “additional insured” on the home owner’s policy while you are  buying the house. That way you can talk to the insurance company for claims.

All right! We are at the end of segment six of this 9-part series. Do you see investing in a foreclosure as part of your near future? In the next segment we will talk about the “dos and don’ts” of approaching delinquent owners. Remember to call or email with any questions.

Comments

[Kim Brien]

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[Ron the Foreclosure Expert]

Gee, .... thanks Kim? What does that have to do with Foreclosures in the Phoenix area? Since you are my first post I will not delete this, but I will remove your link.

[Jason]

Ron, tell me more about how to do the insurance. I've never heard of that but it makes sense, especially sense you may never hear from the frustrated owner again.

[Ron the Foreclosure Expert]

Jason,
If you are assuming the distressed owners loan (no new loan), have them provide a copy of their homeowners policy along with the phone number for their agent. Write in the contract that "buyer to be named as additional insured on sellers homeowners policy." Draft a letter to the insurance company naming you as having an "ownership interest" in the property and have the owner sign and date it. Get it off to the insurance company and insure they agree.

There is one limitation to this: you cannot change the policy in any way -- only the original policy holder can do that. However, you will be provided with a level of insurance coverage and can place claims. Understand you may never see the owner again, so make sure this step is complete.