Frequently Asked Questions

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Frequently Asked Questions

Redleg Funding

Frequently Asked Questions

What are the advantages of using a broker?

A mortgage broker acts as a intermediary between borrowers and lenders, and can offer several advantages over going directly to a lender. These advantages can include access to a wider range of loan products and lenders, the ability to compare rates and terms from multiple lenders, and expertise in navigating the mortgage process and finding the best loan option for the borrower’s needs and situation. A mortgage broker may also have established relationships with lenders and can use these relationships to negotiate better terms and rates for the borrower. Additionally, going through a broker can save time as they handle much of the loan application process on behalf of the borrower.

Is experience an advantage for my mortgage broker?

Yes, experience can be an advantage for your mortgage broker. An experienced broker will have a deep understanding of the mortgage industry and the various loan products available. They will also have established relationships with multiple lenders, which can give them insight into the loan approval process and access to more loan options. An experienced broker can also provide guidance and advice on the best loan options for your specific financial situation and goals, and can help you navigate the complex process of obtaining a mortgage. Overall, an experienced mortgage broker can be a valuable resource in securing the right mortgage for you.

What are the requirements for a 1031 exchange?

A 1031 exchange is a type of tax-deferred exchange under Section 1031 of the Internal Revenue Code. The requirements for a 1031 exchange are as follows:

The property being sold (the “relinquished property”) must be held for use in a trade or business or for investment purposes.

The property being acquired (the “replacement property”) must also be held for use in a trade or business or for investment purposes.

The replacement property must be of “like-kind” to the relinquished property.

The exchange must be structured as a qualifying exchange and must be facilitated by a qualified intermediary.

The taxpayer must identify the replacement property within 45 days of the sale of the relinquished property.

The replacement property must be acquired within 180 days of the sale of the relinquished property or by the due date (including extensions) of the taxpayer’s tax return for the year of the sale, whichever is earlier.

The taxpayer must receive no cash or other taxable boot in the exchange.

The taxpayer must not have actual or constructive receipt of the proceeds from the sale of the relinquished property.

It is important to note that 1031 exchanges are complex transactions and it is recommended to seek the advice of a tax professional to ensure compliance with the requirements and to maximize the benefits of the exchange.

What is BRRRR?

BRRRR is an acronym that stands for “Buy, Rehab, Rent, Refinance, Repeat”. It is a real estate investing strategy that involves purchasing a property, renovating it, renting it out, and then refinancing the property to pull out the cash invested in the renovation and purchase. This process can then be repeated multiple times to build a portfolio of rental properties. The goal of the BRRRR strategy is to generate passive income from rental properties while minimizing the amount of money tied up in each property.

The BRRRR strategy takes advantage of the fact that the value of a property can increase after a renovation, allowing the investor to refinance at a higher amount and access the equity built up in the property. This equity can then be used to repeat the process with another property. By using refinancing as a source of funding, the BRRRR strategy allows investors to maximize their returns and minimize their risk.

What is a DSCR loan?

DSCR, or Debt Service Coverage Ratio, is a commonly used financial metric used by lenders to evaluate the creditworthiness of a borrower when considering a loan application. In the context of a DSCR loan, the lender requires the borrower to maintain a minimum Debt Service Coverage Ratio in order to qualify for and continue to receive the loan.

The Debt Service Coverage Ratio is calculated by dividing the property’s net operating income (NOI) by its total debt service (the sum of all principal and interest payments). A DSCR of 1.0 means that the property generates enough income to cover its debt service, while a DSCR less than 1.0 means that the property does not generate enough income to cover its debt service.

A DSCR loan typically requires the borrower to maintain a DSCR of 1.0 or higher, meaning that the property must generate enough income to cover its debt service. If the DSCR falls below the minimum requirement, the borrower may be required to take steps to improve the property’s financial performance, such as increasing rental income or reducing expenses.

DSCR loans are commonly used in commercial real estate financing and can be a useful tool for lenders to manage risk and ensure that a property generates enough income to support its debt obligations.

What is ARV?

ARV stands for After Repair Value, which is an estimate of the market value of a property after repairs and renovations have been completed. ARV is used in real estate investing, especially in the context of flipping houses or buying and renovating properties to sell.

The ARV of a property is calculated by estimating the cost of the repairs and renovations that need to be made and then adding that amount to the estimated market value of the property in its current condition. The resulting figure represents the estimated market value of the property after the repairs and renovations have been completed.

ARV is a critical factor in determining the potential profitability of a real estate investment, as it sets the upper limit on the price that can be obtained for the property after it has been renovated. Investors use ARV to determine the maximum price they should pay for a property, as well as the amount of financing they can obtain for the renovation work.

It is important to note that ARV is an estimate, and the actual market value of the property after repairs and renovations may be higher or lower than the ARV. Real estate investors must take care to accurately assess the cost of repairs and renovations, as well as the current market conditions and competition, when calculating ARV.

Why can’t I live in my investment property?

There are several reasons why you may not be able to live in your investment property:

  • Zoning restrictions: The property may be located in an area zoned for commercial or industrial use, and not for residential use.
  • Property Type: The property may be a multi-unit building and rented out as individual units, or it may be a commercial property such as a retail store or office building.
  • Financing Terms: The mortgage loan used to purchase the property may have specific terms that prohibit the property from being used as a primary residence.
  • Tax Consequences: If you live in the investment property and use it as a primary residence, it may have tax consequences, such as being considered a personal residence and not a rental property, which may affect your ability to claim deductions and depreciation.
  • Rent Loss: If you live in the investment property, you will not be able to rent it out and collect rental income, which may be a critical part of the investment strategy.

Overall, while there may be many reasons why you can’t live in your investment property, it’s important to understand the restrictions and limitations that apply in your specific situation. If you’re unsure about the rules or want to explore your options, it’s always a good idea to consult with a real estate attorney or financial advisor.

What is hard money?

Hard money is a type of financing for real estate investment properties that is provided by private individuals or companies, rather than traditional financial institutions such as banks. Hard money loans are typically used for short-term real estate investments, such as fix-and-flip projects or bridge loans, and are secured by the property being purchased or improved.

Advantages of hard money loans include:

  • Faster Approval Process: Hard money lenders typically have a faster approval process than traditional lenders, which can be beneficial for real estate investors who need funding quickly.
  • Less Stringent Credit Requirements: Hard money lenders are often more flexible with credit requirements and may be willing to lend to borrowers who have lower credit scores or a history of financial difficulties.
  • Loan Based on Property Value: Hard money lenders typically focus on the value of the property being used as collateral, rather than the borrower’s credit score or financial history. This makes hard money loans a good option for real estate investors who have a solid investment plan but may not qualify for traditional financing.

Disadvantages of hard money loans include:

  • Higher Interest Rates: Hard money loans typically have higher interest rates than traditional financing options, which can increase the overall cost of the loan.
  • Shorter Loan Terms: Hard money loans are typically for shorter terms than traditional financing options, which can result in higher monthly payments and more frequent refinancing.
  • Less Flexible Repayment Terms: Hard money lenders may have strict repayment terms and may not offer the flexibility that borrowers may need to adjust to changing market conditions.

what are non-QM loans?

Non-QM loans, or Non-Qualified Mortgage loans, are a type of mortgage financing that is available to borrowers who do not meet the standard underwriting criteria established by the Consumer Financial Protection Bureau (CFPB) for qualified mortgages (QM). Non-QM loans are designed to provide alternative financing options for borrowers who may not fit into the traditional mold of a qualified mortgage borrower, such as those with a high debt-to-income ratio, a short credit history, or an unconventional source of income.

Advantages of Non-QM loans include:

  • Alternative financing options: Non-QM loans provide alternative financing options for borrowers who may not meet the strict underwriting criteria of traditional mortgage loans.
  • More flexible underwriting criteria: Non-QM lenders may be more flexible with credit and income requirements, allowing borrowers with unique financial situations to qualify for a loan.
  • Reduced paperwork: Non-QM loans often have less stringent documentation requirements, which can streamline the loan application process.

Disadvantages of Non-QM loans include:

  • Higher interest rates: Non-QM loans typically have higher interest rates than traditional qualified mortgages, which can increase the overall cost of the loan.
  • Shorter loan terms: Non-QM loans are often for shorter terms than traditional mortgage loans, which can result in higher monthly payments and more frequent refinancing.
  • Increased risk: Non-QM loans may carry a higher level of risk for both the borrower and the lender, as the borrowers may not have the same level of financial stability as those who qualify for traditional mortgage loans.

What differences are there in the loan process of a long term property rental vs a short term rental property?

The loan process for a long-term property rental and a short-term rental property can differ in several ways, including the type of loan, the underwriting criteria, and the lender’s requirements.

Long-term property rental loans:

  • Loan Type: Long-term property rental loans are typically conventional mortgage loans, which are offered by banks and other financial institutions. These loans are designed for residential properties that will be used for long-term rental purposes.
  • Underwriting Criteria: Long-term rental property loans typically have more stringent underwriting criteria than short-term rental property loans. This may include higher credit score requirements, lower debt-to-income ratios, and a more stable income history.
  • Lender Requirements: Long-term rental property lenders may require the borrower to have experience in property management and a solid business plan for the property. They may also require a higher down payment and reserve requirement, which is the amount of money that must be kept in an account to cover the loan’s payments in the event of a vacancy or other unexpected expenses.

Short-term property rental loans:

  • Loan Type: Short-term property rental loans are often bridge loans or hard money loans, which are offered by private lenders or investment firms. These loans are designed for residential properties that will be used for short-term rental purposes, such as vacation homes or rental properties that are being rehabbed and sold.
  • Underwriting Criteria: Short-term rental property loans may have more flexible underwriting criteria than long-term rental property loans, as they are typically based on the value of the property rather than the borrower’s credit score and income.
  • Lender Requirements: Short-term rental property lenders may not require the borrower to have experience in property management or a solid business plan. They may also require a lower down payment and reserve requirement.

Overall, the loan process for a long-term property rental and a short-term property rental can vary significantly depending on the type of loan and the lender’s requirements. Borrowers should consider their specific financial situation and investment goals when choosing the right loan for their rental property.

What is the difference between non-QM and conventional loans?

Non-QM loans are subject to some, but not all, of the same regulations as conventional mortgage loans.

The Consumer Financial Protection Bureau (CFPB) established regulations for Qualified Mortgages (QM) in 2014 under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Qualified Mortgages have strict underwriting criteria, such as a 43% debt-to-income ratio, that must be met in order for the loan to be considered a QM loan.

Non-QM loans, as the name suggests, do not meet the criteria to be classified as a Qualified Mortgage. As a result, they may not be subject to the same regulations as QM loans. However, they are still subject to federal consumer protection laws, such as the Truth in Lending Act and the Real Estate Settlement Procedures Act, as well as state lending laws.

It’s important to note that while Non-QM loans may not be subject to the same regulations as conventional mortgage loans, they can still carry a higher level of risk for both the borrower and the lender. Borrowers should carefully consider the terms and conditions of Non-QM loans, as well as their own financial situation, before choosing a Non-QM loan for their mortgage financing needs.

What is business use residential lending?

Business use residential lending refers to the use of a residential property for business purposes, typically in the form of a home-based business or rental property. In this scenario, the lender must consider the property’s primary use as well as the borrower’s creditworthiness and ability to repay the loan.

For home-based businesses, the lender must assess the borrower’s personal credit and income, as well as the potential income from the business. The lender may also require a business plan, tax returns, and financial statements to support the loan application.

For rental properties, the lender must consider the rental income and the property’s rental history. The lender may also require a rental analysis and a detailed business plan to assess the property’s cash flow and ability to generate rental income.

In both scenarios, the lender must determine the property’s value, which can be more challenging when the property is being used for business purposes. The lender may require a professional appraisal to determine the value of the property and ensure that the loan amount is appropriate.

It’s important to note that business use residential lending may carry a higher level of risk for both the borrower and the lender. Borrowers should carefully consider their own financial situation and the potential risks before applying for a loan for a business use residential property.

Does RESPA apply to hard money?

The Real Estate Settlement Procedures Act (RESPA) applies to most residential mortgage loans, including investment property loans. However, the specific provisions of RESPA that apply to hard money investment property loans may vary depending on the type of loan and the lender.

Hard money loans are typically short-term loans made by private lenders, often used by real estate investors to purchase or renovate investment properties. As a result, the loan terms and conditions may not be subject to the same regulations as traditional mortgage loans.

That being said, hard money lenders are still subject to federal consumer protection laws, including RESPA, which requires lenders to provide borrowers with disclosures about loan terms and costs, as well as a good faith estimate of settlement costs. Additionally, RESPA prohibits kickbacks and referral fees in real estate transactions.

It’s important for borrowers to carefully review the terms and conditions of their hard money investment property loan, including any RESPA disclosures, to ensure that they understand the costs and obligations associated with the loan. Borrowers should also consider seeking the advice of an attorney or real estate professional to help navigate the loan process and protect their interests.

Why does investor experience matter for investment loans and hard money lenders?

Investor experience is important for investment loans and hard money lenders because it provides insight into the borrower’s ability to successfully complete a real estate investment project. An experienced investor is more likely to have a track record of successful projects, a deeper understanding of the market, and a better understanding of the risks involved in a project. This can reduce the risk of default and increase the likelihood of the project being completed on time and within budget. Hard money lenders, in particular, often lend money based on the value of the property being purchased or improved, so the experience of the borrower is a crucial factor in determining the loan amount and terms.