Private Lender Question (loan, interest rate, real estate, approved)
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
We bought our present property via a private lender almost two years ago. His interest rate was 12% so monthly payments have been high, all of it going to interest only.
The property is titled in our name and secured by a Deed of Trust with the Beneficiary being the private lender.
We have tried diligently for the two years to obtain standard mortgage financing for this property, and have been unable to do so; meanwhile, we've paid out $30,000 to the private lender that is all interest, nothing to principal. We have no assurance whatever that we will be able to get standard mortgage financing within the foreseeable future. The private lender, however, has recently raised his interest rate to 14.5%.
The problem getting standard mortgage financing has nothing to do with our personal finances, we qualify fine -- the property is the problem. It's a manufactured home with an adjacent stick-built combo garage/large workshop that is unfinished. The fact the structure is not finished is the road block, but we can't afford to finish it until we get monthly mortgage payments at a much lower interest rate.
We have decided that we just can't go on treading water like this and that our best bet is to buy a different property.
My question has to do with the private lender. He's a pretty nice guy, he knows what we've been up against, and he will understand why we have made the decision. But before we talk with him, we'd like to have some idea how turning the property over to him will "work". In other words, this won't be the same as a foreclosure, will it? We are thinking we can just assign title to him and that would be the end of it.
Why in the world would you do this in the first place?
You're looking for an FHA 203k loan, wherein the garage would be finished as part of the improvement. But the home has to pass tests, such as permanent tie downs, concrete runners, etc.
You dont have to finish it, completely. Just do the bare minimum that it will take to call it "finished" in the eyes of the town and bank. Should take that much money, just a little hard work.
I've posted here before -- if you run my name in Search you can come up with details (long version), but the short version is that we have been through 4 different lenders, meaning 4 different appraisals. Sought FHA financing twice (our very first attempt to get financing was for an FHA 203k Streamline and the underwriters said that what needed to be done to finish the incomplete stick-built structure didn't meet the parameters of an FHA 203k Streamline). Have sought VA financing twice.
One appraiser gave the property a very nice value but stated it was "unique" and that was enough to get us turned down. Other appraisers have said the stick-built structure was attached to the manufactured home, and it is not -- we had proof it was not attached (approved plans, building inspections were passed up to the point the previous owners ran out of money and had to stop construction), and the appraisers refused to look at our proof.
The most recent financing attempt (FHA) took 6 MONTHS from the time we applied until the turn-down. The appraiser valued the property at $120,000 "conditional upon" the combo garage/workshop being completed. The lender sent out an FHA Fee Inspector who told us everything looked fine to her for FHA financing, and then in her report she stated otherwise. She said that the property doesn't come up to FHA Minimum Property Requirements because the combo garage/workshop is not finished on the interior, and she recommended an FHA 203k to complete that construction, her estimate of cost was $40K to $50K. That's ridiculous -- we've had construction estimators out there, and detailed estimate came in under $30,000. My husband has construction experience, and if WE do the interior work (basically insulation and drywall) and only pay to have the electrical and plumbing done by contractors, we can likely get it done for under $20,000.
If we did the FHA 203k as the Fee Inspector recommended, our scenario would be this: (1) we only owe $118,000 on this property ... (2) the property appraised for $120,000 but only on the condition that the combo garage/workshop was completed ... (3) it was estimated to cost $40K to $50K to complete, so let's say we do that ... (4) we now have approximately $168,000 into a property that per the appraiser is worth $120,000 ... so the lender is not going to loan on that because the value doesn't come up to what we would then need to borrow.
Meanwhile, the monthly amount we are paying to the private lender is so high that we can't afford to begin the finish work ourselves for the combo garage/workshop. We only went with the private lender because the property was headed for foreclosure and we needed time. We knew it might take a little while because of the market, but the first 2 appraisals done had come in at very nice values, so we had no reason to think that we wouldn't be able to find standard financing.
Back to my basic question (more or less): is there anything we need to know about giving title to the private lender that could come back and bite us?
My question has to do with the private lender. He's a pretty nice guy...
If he's such a nice guy, why is he charging 14.5% interest? You need to read your contract and understand it. If you don't fully understand all of the implications, you should consult with an experienced real estate attorney. There may be clauses in your contract that, even if you deed the house back to him, the "nice guy" might be able to sue you for what is owed.
What state are you in? You need to check state law to see if there are any limitations on what a private lender may charge. In Michigan, the maximum allowable interest rate is 11%. Overall, it sounds like you got stuck in a very bad deal. You may want to cut your losses, but before taking any action you should get legal advice.
You own the house and he is the bank- no different from getting a loan from a big box bank.
If you stop making payments he will foreclose and depending on your state laws sue you for deficiency. If you "give back" the house this is called "deed in lieu of foreclosure" Or in laymans terms- foreclosure without making the lender fight for it. Any of this can be reported to the credit bureau's.
Just an observation here but if this were a big box bank they would be viewed by the OP as abusive, predatory, not willing to work with us, cold hearted etc etc etc. But because it is an individual he is a "nice" guy.
Go speak with a real estate attorney and find out what your options are.
If he's such a nice guy, why is he charging 14.5% interest? You need to read your contract and understand it. If you don't fully understand all of the implications, you should consult with an experienced real estate attorney. There may be clauses in your contract that, even if you deed the house back to him, the "nice guy" might be able to sue you for what is owed.
What state are you in? You need to check state law to see if there are any limitations on what a private lender may charge. In Michigan, the maximum allowable interest rate is 11%. Overall, it sounds like you got stuck in a very bad deal. You may want to cut your losses, but before taking any action you should get legal advice.
We're in Arizona. Basically, if we agree to the terms of the contract, he can charge a high interest rate, and 14.5% is within the allowable for this state. I say he is a nice guy because he is -- we've formed a friendship, he's visited in our home, we've got things in common, etc. Private lending is his business, he is risking his own money and we understand that. He typically charges 15% interest from the get-go, but he knew we had already put a bunch of money into the property and so he dropped his rate for us. He also does not typically lend much beyond a year, but we are now approaching the third year of this deal, so he's worked with us.
But yes, agreed that we should get some legal advice before taking any definite steps.
You own the house and he is the bank- no different from getting a loan from a big box bank.
If you stop making payments he will foreclose and depending on your state laws sue you for deficiency. If you "give back" the house this is called "deed in lieu of foreclosure" Or in laymans terms- foreclosure without making the lender fight for it. Any of this can be reported to the credit bureau's.
Just an observation here but if this were a big box bank they would be viewed by the OP as abusive, predatory, not willing to work with us, cold hearted etc etc etc. But because it is an individual he is a "nice" guy.
Go speak with a real estate attorney and find out what your options are.
Well, I don't know that we would view a big box bank as abusive, predatory and whatnot under similar circumstances. Big box banks don't charge such high interest rates anyway. This guy also buys properties to fix/flip, so it may not be a problem to him to simply take over the property, as he could complete the finish work of the stick-built structure and then sell the place.
Well, I don't know that we would view a big box bank as abusive, predatory and whatnot under similar circumstances. Big box banks don't charge such high interest rates anyway. This guy also buys properties to fix/flip, so it may not be a problem to him to simply take over the property, as he could complete the finish work of the stick-built structure and then sell the place.
That may all be true but remember that unless it is structured as you sell it back to him for the balance on the note it could be reported as a foreclosure. For example you owe $250k, you sell it to him for $250k and satisfy the Note. Don't just give him the keys and move out on a handshake.
Be careful, get an attorney and protect yourself from having a foreclosure on your credit.
Usually there's a note which represents your financial obligation to the lender along with the title which represents your interest. Your situation could be diferent. But the general idea is that even if you where to give the house back to him, the note might still be in effect. It's possible to give him the house yet still have the full financial obligation to him! If it does somehow work out then you need to be aware of possible tax implications with respect to forgiveness of debt.
I'd see what you can verbally agree to with this guy then hire an attorney to make sure all the paperwork is in order. You are in a tough situation. With interest rates at historic lows I can't see why any contract sale would be at rates much higher than maybe 5-8%, and certainly fully amortized rather than interest only. You were taken advantage of.
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
