What is a hard-equity loan?

Hard-equity loans have no plain, concise definition. People define these loans differently. Mortgage lenders, mortgage brokers, borrowers and federal and state regulatory agencies have their own interpretations.

Generally, the most important thing to consider when creating a hard-equity loan is the value of the real property without regarding the mortgagor or mortgagor’s income, credit or other assets. A hard-equity-mortgage lender determines the property value by personal experience or real-estate appraisals.

The loan-to-value and terms can temper other factors. The loan-to-value affects interest yields. Hard-equity investors also can place a personal spin on factors. Other factors include combined loan-to-value and property types as well as the mortgagor’s income, job, credit, assets and status of foreclosure or bankruptcy. The condition of the subject and condition and type of neighboring property also come into play.

The Home Ownership Equity Protection Act of 1994 (HOEPA) also has changed the definition. A loan regulated by the act is known as a HOEPA loan, a Section 32 loan, a Section 129 loan or a High Cost loan.

A HOEPA loan is a loan on a borrower’s principal residence closed after Oct. 1, 1995. On this type of loan, the fees exceed federally set amounts or the annual percentage rate exceeds an interest rate calculated monthly, based on comparable U.S. Treasury securities. Statutory disclosures, requirements and limitations exist, and many hard-equity mortgage lenders do not make HOEPA loans. Thus, even less credit is available for certain borrowers.

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Hard-equity lenders overlook many items that are critical to traditional lenders. These details include foreclosures, bankruptcies, judgments, credit dings, damages, unreported income, high debt ratios, unknown down-payment sources and the total of outstanding mortgages. In return, the loan-to-value will be lower and the interest rate, brokerage points and fees will be higher than what traditional loans offer.

As professionals, mortgage brokers should shop for the best rates and terms for their borrowers. In many cases, though, the only alternatives are hard-equity loans or no loans. A hard-equity lender provides necessary services for a borrower who does not qualify for loans from typical lenders.

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Who wants a hard-equity loan?

No one wants a hard-equity loan. It is a stopgap to give homeowners time to correct their situations. Clients need them in times of a:

• Foreclosure
• Bankruptcy
• Divorce
• Borrower’s death
• Credit problem
• Job loss
• Business failure
• Unreported income
• Tax lien

These are the predominate instances in which a hard-equity loan will solve a client’s financial situation. Keep in mind that the three primary reasons for foreclosures and credit problems are divorce, death of a borrower and job loss. All are fertile areas for marketing to generate hard-equity loans.

What benefits do these loans bring to the mix?

Your competition might be brokering hard-equity loans. Borrowers whom you cannot reach with conventional loans can shift to them.

Do not leave money on the table. You will miss more than half of the mortgage market — more than 50 percent of all borrowers do not qualify for conventional financing.

After finding clients, the work comes down to processing loans. It’s a simple process, requiring:

• Loan-application form No. 1003
• Good Faith Estimate
• Proper disclosures such as the HOEPA and Real Estate Settlement Procedures Act documents.
• Credit report
• nReal-estate appraisal
• Payoffs
• Title insurance

A hard-equity mortgage lender can process your mortgage loan and will prepare the HOEPA loan disclosures.

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Hard-equity-brokerage fees are significantly higher than the oneto two-point average charged on conventional loans. In Florida, for example, hard-equity-brokerage points range from two to 10 points, with an average of five to seven points.

The short time from applying to closing also is an advantage to hard-equity loans. Income and credit usually are not considered, so closing takes a few days, compared to weeks for a conventional loan.

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