Financing REO Properties: Where to Get an REO Loan

An REO is a property that’s owned by a lender after that property was unsuccessfully offered at a foreclosure auction. For real estate investors, REO properties present a unique opportunity to buy undervalued properties to rent or flip. Which REO loan will be best for your next investment will depend on the condition of the property, your strength as a borrower, and your experience with real estate investing.

LendingHome, who sponsored this article, is hard money lender that can help REO investors nationwide. LendingHome offers interest rates starting at 7.5% and lends up to 90% LTV. Get prequalified for your next project in minutes.

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What Are Your REO Loan Options?

REO properties are often financed using either a hard money loan or a conventional mortgage.

A conventional mortgage is a permanent financing option offered by traditional banks and is more common for long-term owner-occupied properties and rental investors. Hard money loans are offered by private money lenders and are more common for short-term fix-and-flip investors or those who are competing with all-cash buyers.

Hard Money Loan vs Conventional Mortgage: Cost, Terms, Qualifications

Hard money loans and conventional mortgages are broken down into 4 components:

• Loan Amount & Down Payment
• Timeline (Approval, Funding, Term)
• Interest Rates & Fees
• Qualifications & Use

Let’s take a moment to discuss each component in-depth.

1. REO Loan Amount & Down Payment

Hard Money Loan vs Conventional Mortgage: Loan Amount & Down Payment

	Hard Money Loan	Conventional Mortgage
Maximum Loan Amount	Up to 90% of LTV Up to 80% of ARV	80% - 96.5% of LTV
Minimum Down Payment	10%+ of LTV 20%+ of ARV	3.5% - 20% of LTV
More Information	Visit LendingHome	Visit Your Local Bank

Conventional mortgages offer REO investors a maximum loan amount between 80% – 96.5% of a property’s loan-to-value (LTV) ratio. This means that traditional banks lend up to 96.5% of an REO property’s purchase price. REO investors who use conventional mortgages should expect to cover a down payment between 3.5% – 20% of the property’s LTV ratio. The property must be in good condition prior to lending.

Hard money loans offer REO investors a maximum loan amount up to 90% of a property’s loan-to-value (LTV) ratio and up to 80% of a property’s after-rehab-value (ARV) ratio. A hard money loan’s LTV ratio is very similar to the structure you find with conventional mortgages. A hard money loan’s ARV ratio, however, is different when compared to the loan amount of conventional mortgages.

Hard money lenders issue loans based on LTV when the REO property is in good condition and issue loans based on ARV when the REO property is in poor condition. This is because ARV represents the expected fair market value (FMV) of an REO property after it’s been renovated.

REO investors using hard money loans should expect to cover at least 10% of an REO property’s LTV with cash if the property’s in good condition. If the property’s in poor condition, REO investors should expect to cover at least 20% of a property’s ARV with cash.

LendingHome is a national hard money lender that offers hard money loans for properties in both good and poor condition. LendingHome issues loans up to 90% LTV and up to 75% ARV; interest rates start as low as 7%. Visit LendingHome today:

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2. REO Loans Timeline (Approval, Funding, Term)

Hard Money Loan vs Conventional Mortgage: Timeline (Approval, Funding, Term)

	Hard Money Loan	Conventional Mortgage
Typical Loan Term	1 - 3 years	15 - 30 Years
Time to Approval	As little as 3 minutes	30 - 45 Days
Time to Funding	10 - 15 Days	30 - 45 Days
More Information	Visit LendingHome	Visit Your Local Bank

Conventional mortgages are a long-term financing option for REO investors. These conventional mortgages offer a typical loan term between 15 – 30 years and a total time to approval and funding between 30 – 45 days. Traditional banks break down the loan approval process into three steps: pre-qualification, pre-approval, and funding. The entire process, from pre-qualification to funding, takes roughly 30 – 45 days.

This is important to note because REO properties are usually offered by motivated sellers and sell fast. REO investors might have issues with a conventional mortgage’s time to funding if they need to move quickly on an REO property.

Hard money loans, on the other hand, are short-term financing options for REO investors with a comparatively quick approval and a quick time to funding. This is why hard money loans are the preferred financing option for REO investors. LendingHome, for example, offers REO investors a typical hard money loan term around 12 months, an approval time as short as 3 minutes, and a time to funding between 10 – 15 days.

Hard money loans offer REO investors a fast option to compete with all-cash buyers and other investors who are able to move quickly on an REO property. However, because of the comparatively short loan term, REO investors either need to fix-and-flip a property or refinance to a conventional mortgage before the loan expires.

3. REO Loan Interest Rate & Fees

Hard Money Loan vs Conventional Mortgage: Interest Rate & Fees

	Hard Money Loan	Conventional Mortgage
Interest Rates	7% - 12%	4% - 6%
Points (Lender Fees)	1.5 - 10 Points	0 - 1 Points
More Information	Visit LendingHome	Visit Your Local Bank

Conventional mortgages have a low interest rate between 4% – 6% annually. This is because conventional mortgages have a longer term and mortgage payments are amortized, combining interest and principal together as a single monthly payment.

Further, conventional mortgages assess lender fees known as “points” between 0 – 1. Each point on a loan equals a 1% fee; points are taken directly out of the loan and REO investors don’t have to cover it as an out-of-pocket expense.

Hard money loans have comparatively higher interest rates to compensate for the short loan term and increased risk that comes from less strict loan qualifications (discussed below). Hard money lenders such as LendingHome offer REO investors interest rates that start between 7% – 12%. Further, hard money lenders charge interest-only payments and then require the loan amount to be paid in full at the end of the term.

Hard money lenders typically charge a comparatively higher amount of points on hard money loans. Many hard money lenders charge fees as high as 10 points. LendingHome, however, offers loans that have a tiered distribution of points:

• 2.5 points: Loans between $120,000 – $249,999
• 2 points: Loans between $250,000 – $499,999
• 1.5 points: Loans $500,000+

LendingHome has a minimum floor equal to $3,000 for REO properties below $120,000. For more information on the lender’s competitive fees and interest rates, visit LendingHome today:

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In addition to these fees, REO investors should expect to cover any closing costs between 2% – 5% as part of the sale process. Closing costs can either come out-of-pocket or can be included in the overall loan amount for both conventional mortgages and hard money loans.

4. REO Loan Qualifications & Use

Hard Money Loan vs Conventional Mortgage: Qualifications & Use

	Hard Money Loan	Conventional Mortgage
Qualifications for Approval	2 - 3 Months personal bank statements Purchase contract List of past projects Contractor bid and scope of work Answers to basic questions Min. credit score of 550 (check your credit score here for free)	Total monthly debt Employment history 2 current pay stubs Debt-to-income ratio less than 50% Min. credit score of 640 (check your credit score here for free)
Property Type	Single family home + multi-unit property in most conditions	Single family home + multi-unit property in good condition
More Information	Visit LendingHome	Visit Your Local Bank

Conventional mortgages have strict qualifications for approval. Traditional banks require that borrowers submit an employment history between 3 – 5 years, their total monthly debt, and 2 current pay stubs. They also generally require borrowers to have a debt-to-income ratio less than 50% and a minimum credit score of 640 (you can check your credit score here for free).

As part of the qualifications for loan approval, conventional mortgages also require that the REO properties be in good condition. Conventional mortgages can be used to fund the purchase of a single-family home, apartment, condo, or multi-unit property. However, traditional banks only loan out between 4 – 10 conventional mortgages to a single borrower.

Hard money loans have comparatively less strict qualifications for approval. Hard money lenders first require that borrowers answer basic questions such as desired location and purchase price, submit 2 -3 months bank statements, and have a minimum credit score of 550. Lenders then require that borrowers submit a purchase contract for the REO property.

If you’re taking on a rehab project, hard money lenders also require you to provide a list of past rehab projects, contractor bids, as well as the rehab scope of work. There is no limit to the number of hard money loans you can have at one time.

Where to Get REO Financing

Hard money REO loans are issued by hard money lenders while conventional mortgages are issued by traditional banks. Hard money lenders offer loans based on a property’s loan-to-value (LTV) ratio or a property’s after-rehab-value (ARV). Traditional banks offer loans based on a property’s LTV and don’t offer loans on REO properties in need of repair:

Let’s take a moment to discuss where you should go to finance your REO property.

REO Financing With a Traditional Bank

Traditional banks offer conventional mortgages on REOs in good condition. Unlike hard money lenders, traditional banks don’t offer loans on REO properties deemed to be in poor condition. This is why they only offer conventional mortgages on REO properties as a percentage of the property’s LTV.

Conventional mortgages are used by buy-and-hold investors who want to invest in REO properties long-term. These investors are typically portfolio investors with multiple properties or long-term investors looking for rental properties. Short-term fix-and-flippers typically don’t use conventional mortgages issued by traditional banks to fund the purchase of REO properties.

It’s possible to obtain a conventional mortgage from any of the large traditional banks. However, banks only loan up to a total of 4 – 10 conventional mortgages to each investor. The actual mortgage limit depends on the bank, but lenders take all investor mortgages into account and not just the mortgages that the lender underwrote themselves.

Further, some lender-owners of REO properties are so motivated to sell that they offer potential borrowers conventional mortgages with advantageous interest rates. This only occurs in a slow real estate market and with a prime borrower who is less risky than the original owner. It’s uncommon but it’s still worth contacting the lender through your real estate agent to see what’s possible.

Regardless of where you obtain the conventional mortgage, REO properties sell fast and the longer approval time and funding time can work against you. It’s important to get pre-approved before you even start looking for REO properties.

REO Loans With a Hard Money Lender

Hard money lenders such as LendingHome offer hard money loans for two distinct REO scenarios. When an REO property is in good condition, hard money lenders offer a standard hard money loan based on a percentage of the property’s LTV. When an REO property is in poor condition, hard money lenders offer a rehab loan based on a percentage of the property’s ARV.

REO Properties in Good Condition

REO investors looking at an REO property in good condition sometimes use hard money loans to fund the purchase. These investors are usually long-term buy-and-hold investors who seek to own one or more rental properties.

However, since conventional mortgages also fund REO properties in good condition, investors who use a hard money loan typically do so because they’re either a portfolio investor with more than the 4 – 10 mortgage limit, or because they don’t meet the higher qualifications of a conventional mortgage. Other cases arise when long-term investors compete with all-cash buyers and need to move on an REO property fast. This is due to the fact that investors need a short approval and funding timeline to compete with all-cash offers.

When any of these are the case, investors typically use a hard money loan to make the initial purchase before refinancing to a conventional mortgage once they meet qualifications.

REO Properties in Poor Condition

REO investors looking at a property in poor condition usually work exclusively with a hard money lender since rehab loans fund the purchase and renovation of a property. This is in contrast to traditional mortgages that don’t fund renovations and require houses to be in good condition prior to lending.

Rehab loans fund an REO property’s purchase and renovations and are used by short-term fix-and-flippers as well as long-term buy-and-hold investors. Fix-and-flippers typically use a rehab loan to purchase an REO property in poor condition, renovate it, and sell it within 12 months. The sale is then used to pay off the hard money lender.

Buy-and-hold investors, on the other hand, use rehab loans to purchase an REO in poor condition, rehab it, and then rent it out to tenants before refinancing with a traditional mortgage. The money from the refinance is used to pay off the hard money lender.

For more information on the right hard money loan for you, contact our partners at LendingHome. They offer hard money loans up to 90% LTV for REO properties in good condition and up to 75% ARV for REO properties in need of renovations. Interest rates start at 7% and prequalification takes minutes. Find out what you’re approved for today.

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How to Apply for an REO Loan

Conventional mortgages and hard money loans have different loan application processes. If you’re considering an REO property, it’s important to understand how to apply for both a conventional mortgage as well as a hard money loan. Let’s take a moment to discuss the application process for each.

Hard Money Lender

Hard money lenders break down the hard money loan application into two stages:

1. Pre-qualification – Borrowers provide lenders with estimated project information and basic borrower information to get initial loan numbers.
2. Closing – Borrowers provide lenders with sale contract and any contractor quotes (if necessary) to finalize the hard money loan.

1. Pre-Qualification For Hard Money Loans

Hard money lenders use the pre-qualification stage to offer borrowers back of the napkin numbers regarding their potential hard money loan. During this stage, borrowers should receive an expected ARV or LTV ratio, costs, fees, interest rates, and other terms. Prequalification is quick and non-binding and helps an investor get a “yes” or a “no” when assessing an REO property.

Generally, borrowers should expect to submit the following during this stage:

• Personal Bank Statements – 2-3 Months of Personal Bank Statements
• Personal Credit Score – 550+ (check your credit here for free)
• Basic Questions – A few questions about you and the potential property, such as:
  • Desired property location
  • Expected offer amount
  • Borrower’s name and tax ID (either a person or an entity).

With a lender like LendingHome, REO investors can get pre-qualified in as little as 3 minutes. During this stage, you’ll be presented with several loan options. These options are nonbinding but they let you get a sense of your maximum budget and investment options.

Get Prequalified With LendingHome

2. Closing For Hard Money Loans

The closing process takes the estimated numbers generated from pre-qualification and finalizes them using more in-depth borrower information. During the closing stage, borrowers are approved for a loan, and the loan’s ARV or LTV ratio, interest rate, costs, and other terms are set in stone. The process takes anywhere from 10 – 15 days.

Specifically, you should expect to provide the following during closing:

• Purchase Contract – A contract that outlines the purchase agreement between buyer and seller, including purchase price. The contract is non-binding and stipulates that it’s contingent “upon lender approval.”
• List of Past Projects – For rehab projects, hard money lenders sometimes require a list of past rehab projects. The rule of thumb is that you’ll either want to have 2 – 3 projects under your belt or work with a licensed contractor.
• Contractor Bids – If you’re inexperienced with rehab projects or have completed less than 2 past projects, hard money lenders allow you to work with a contractor and require contractor bids as part of the application. When this is the case, hard money lenders traditionally want the contractor’s business name, license number, as well as the total bid amount.
• Scope of Rehab Work – Regardless of rehab experience, hard money lenders require a scope of rehab work if you intend to renovate an REO property. If you’re experienced, you can provide this scope of work yourself along with the expected renovation budget. If you’re inexperienced, your contractor can provide the lender with the scope of work along with his or her total bid.
• Appraisals – Most hard money lenders conduct their own appraisals when assessing property value. LendingHome, for example, conducts an “as-is appraisal” to determine an REO property’s current fair market value (FMV) as well as an “ARV appraisal” to determine the property’s expected value after repairs, if any. The appraisals are important because they determine an REO property’s LTV and / or ARV.
• Fees and Upfront Costs – Borrowers should expect to see any fees and upfront costs come right out of the initial loan amount. Lenders such as LendingHome typically subtract their lender fees from the funds given to purchase an REO property.

Traditional Bank

Traditional banks typically break down their loan application process into three steps:

• Pre-qualification – Borrowers receive a pre-qualification letter with rough loan estimates.
• Pre-Approval – Borrowers supply all necessary documents to verify the information given during pre-qualification.
• Closing – Lenders assess the documents given during pre-approval, finalize the loan approval, and issue the loan.

1. Pre-Qualification for Conventional Mortgages

Borrowers receive a pre-qualification letter during this stage. Pre-qualification letters are fairly easy to obtain and give a rough estimate regarding a borrower’s potential loan size.

Traditional banks base their pre-qualification letters and estimated loan size on the verbal self-reporting of a borrower’s annual income, total assets, total debts, and desired down payment.

Borrowers can then use this pre-qualification letter to approach the owner of an REO property and begin to negotiate a deal. The letter gives borrowers an idea of their maximum budget, which can help them find the right REO properties for their needs.

2. Pre-Approval for Conventional Mortgages

The pre-approval stage is when traditional banks verify all the verbal numbers a borrower gave in the previous step. It’s at this stage, similar to the closing stage for hard money loans, that borrowers are required to submit all required documents and the final loan numbers are calculated.

You should expect to provide the following during this stage:

• Total Monthly Debt – Borrowers are required to provide traditional banks with records of all of their outstanding debts. These debts can include such things as credit card debt, car loans, other mortgages, student loan debt, and more.
• Employment History – Traditional banks typically require that lenders provide information on their last three employers or their last 3 – 5 years of employment history.
• 2 Current Pay Stubs – Borrowers have to give conventional mortgage lenders their two most recent pay stubs to verify their income.

Traditional banks will then use your total monthly debt and your 2 current pay stubs to determine your debt-to-income ratio. Remember that most lenders require borrowers to have an annual debt-to-income ratio less than 50%. Lenders also require that borrowers have a minimum credit score of 640 and will conduct a “hard pull” on your credit report.

Once you’re pre-approved, you’ll receive a conditional letter of pre-approval that states the exact terms of your loan, which includes the LTV ratio, interest rate, costs, and other terms. While you can get a sense of your loan amount in the previous step, most REO sellers will want to see your pre-approval letter before negotiating on the property.

3. Closing for Conventional Mortgages

Once you have your letter of pre-approval, you are free to make an offer on an REO property. If you’re able to negotiate a purchase price and close the deal, you’ll then need to hire an appraiser or appraisal company to verify the fair market value (FMV) of the property. This is important because banks want to check the agreed purchase price against the property’s FMV.

This appraisal process can take as long as two weeks. However, many traditional banks have their own in-house appraisers which helps speed up the process. Once the REO property is appraised, you’ll be able to receive your conventional mortgage funds within 1 – 2 days and execute the purchase.

Bottom Line

REO properties can be financed by two types of loans: hard money loans and conventional mortgages. Hard money loans offer a quick financing option that’s suitable for fix-and-flippers as well as buy-and-hold-investors. Conventional mortgages are suitable for long-term investors looking to invest in an REO rental property.

However, due to the short loan term and quick time to pre-qualification and closing, hard money loans are the preferred financing option for REO investors. LendingHome, for example, offers pre-qualification in as little as 3 minutes and closing in as quick as 10 – 15 days. Further, they offer interest-only payments starting at 7.5% and lender fees at or below 2.5%.

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