An REO is a piece of real estate that is owned by a lender after that property was unsuccessfully offered at a foreclosure auction. Financing REO properties is typically done with two types of REO loans: hard money loans and conventional mortgages. REO loan rates are generally 4.5% – 12% with terms of one year to 30 years.
LendingHome is a hard money lender that investors use for financing REO properties. They’re a reputable nationwide lender that offers competitive rates for prime borrowers. Contact them today and get prequalified online in just a few minutes.
REO Financing & Who It’s Best For
|Hard Money Loan||Short-term fix-and-flip investors and those needing to compete with all cash buyers.|
|Conventional Mortgage||Long-term buy-and-hold investors and owner-occupied properties.|
There are generally two types of REO loans:
1. Hard Money Loans for Financing REO Properties
Hard money loans are short-term interest only loans that fund the purchase and renovation of REO properties. They’re used by investors for financing REO properties so they can compete with all cash buyers. Investors also use them to buy properties that are in bad condition that conventional lenders wouldn’t fund. However, they can also be used by investors who don’t meet the qualifications of conventional mortgages.
“Typically, hard money loans are a great option for flippers who want to get in, fix and sell without having to put all their cash into the property. Also, hard money loans are not as document-heavy as conventional loans, and thus they are less time-consuming to obtain. They, of course, are much more costly in terms of up-front points, plus interest rates easily double a typical conventional loan.” – Sepehr “Sep” Niakan, Broker, HB Roswell Realty
Hard Money REO Loan Costs
Typical hard money REO loan costs are:
- Rate: 7% – 12%
- Points: 1.5 – 10
- Closing Costs: 2% – 5%
Hard money loans have higher interest rates to compensate for the short loan term and increased risk that comes from less strict loan qualifications. 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.
For more information on figuring out the costs associated with a hard money loan, check out our free hard money calculator.
Hard Money REO Loan Terms
Hard money REO mortgage terms are generally:
- Term: 1 – 3 years
- Loan to Value (LTV): Up to 90%
- After Repair Value (ARV): Up to 80%
- Down Payment: 10% – 20%
- Funding Time: 10 – 15 days
Hard money lenders issue loans based on LTV when the REO property is in good condition. This means that they lend money based on the property’s current value. They issue loans based on ARV when the REO property is in poor condition. This means that they issue loans based on the expected value after the property is rehabbed, also known as the fair market value (FMV).
Hard Money REO Loan Qualifications
Hard money REO loan qualifications are generally:
- Property Type: Single family and multifamily
- Property Condition: Any
- Bank Statements: 2 – 3 months
- Purchase Contract
- Real Estate Experience: List of past projects, contractor estimates and scope of work
- Credit Score: 550+ (check yours for free here)
How to Apply for a Hard Money REO Mortgage
Hard money lenders generally break down the hard money loan application into two stages:
- Prequalification – Borrowers provide lenders with estimated project information and basic borrower information to get initial loan numbers.
- Closing – Borrowers provide lenders with the sale contract and any contractor quotes (if necessary) to finalize the hard money loan.
1. Prequalification for Hard Money REO Mortgage
Hard money lenders use the prequalification stage to offer borrowers back of the napkin, non-binding 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:
- Bank Statements: 2 – 3 months of personal bank statements
- Credit Score: 550+ (check yours for free here)
- Basic Questions: A few questions about you and the potential property, such as property location, borrower’s name and tax ID or Social Security number and potential purchase price
With a lender like LendingHome, REO investors can get prequalified in as little as three minutes. During this stage, you’ll be presented with several loan options. These options are non-binding, but they let you get a sense of your maximum budget and investment options.
2. Closing for Hard Money REO Mortgage
The closing process takes the estimated numbers generated from prequalification 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 to 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 two to three projects under your belt or work with a licensed contractor.
- Contractor Bids: If you’re inexperienced with rehab projects or have completed less than two 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 and 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.
- Appraisal: Most hard money lenders conduct their own appraisals when assessing property value. 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 subtracts their lender fees from the funds given to purchase an REO property.
Where to Find Hard Money Loans for REO Properties
REO financing can be found through reputable online hard money lenders such as LendingHome. They offer nationwide interest only REO loans and can close as quickly as 10 to 15 days. They offer competitive rates for prime borrowers and can prequalify you online in a few minutes.
2. Conventional Mortgages for Financing REO Properties
Conventional mortgages can be used to finance REO properties. However, unlike hard money loans, they don’t lend based on ARV, so the properties need to be in good condition. Typical conventional REO loans are considered permanent and have 15-year to 30-year terms.
Conventional REO Loan Costs
Conventional REO loan costs are typically:
- Rate: 4.5% – 6.5%
- Points: 0 – 1
- Closing Costs: 2% – 5%
Conventional mortgages have comparatively lower interest rates because they have a longer term and mortgage payments are amortized, combining interest and principal together as a single monthly payment.
Conventional REO Mortgage Terms
Terms for a conventional REO loan are generally:
- Term: 15 – 30 years
- LTV: 80% – 96.5%
- ARV: Conventional banks don’t usually lend on ARV
- Down Payment: 3.5% – 20%+
- Funding Time: 30 – 45-plus days
A conventional REO mortgage lender doesn’t lend based on ARV, so it’s not the right option for fix and flippers. The entire process, from prequalification to funding, takes roughly 30 to 45 days. This is important to note because this timeline may make it difficult to compete with the shorter timeline of a cash buyer.
Conventional REO Loan Qualifications
Conventional REO mortgage qualifications are generally:
- Property Type: Single family and multifamily
- Property Condition: Up to code and move in ready
- Pay Stubs: Two most recent
- Employment History: Two-plus years
- Purchase Contract
- Real Estate Experience: None required
- Credit Score: 640+ (check yours for free here)
- Debt-to-Income Ratio (DTI): Less than 50%
Conventional mortgages can be used to fund the purchase of a single family home, apartment, condo, or multi-unit property. However, traditional banks only lend out between four and ten conventional mortgages to a single borrower.
How to Apply for a Conventional REO Mortgage
A conventional REO mortgage is typically offered by a bank or credit union, and they generally break down their application process into three main steps. Prequalification comes first and gives the borrower a rough estimate of what they’re approved for. Next is the preapproval process and lastly the closing process.
Traditional banks typically break down their loan application process into the following three steps:
1. Prequalification for Conventional REO Mortgages
Borrowers receive a prequalification letter during this stage. Prequalification letters are fairly easy to obtain and give a rough estimate regarding a borrower’s potential loan size.
Traditional banks base their prequalification 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 prequalification 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. Preapproval for Conventional REO Mortgages
The preapproval 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 two-plus years of employment history.
- Two 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 two current pay stubs to determine your debt-to-income ratio. Remember that most lenders require borrowers to have an annual debt-to-income ratio of less than 50%.
Once you’re preapproved, you’ll receive a conditional letter of preapproval 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 preapproval letter before negotiating on the property.
3. Closing for Conventional REO Mortgages
Once you have your letter of preapproval, you are free to make an offer on an REO property. After your offer is accepted, the bank will send out an appraiser to determine the property’s value. The appraiser usually compiles their report within a few days, and the bank finishes up the underwriting process and then gives you the clear to close. Generally, the timeline from loan application to closing is 30 to 45 days.
Where to Find Conventional Mortgages for REO Properties
LendingTree is a reputable nationwide lender marketplace that offers REO financing. They give you multiple loan offers from several lenders, which makes comparison shopping easy. They offer competitive rates for prime borrowers and can get you prequalified in just a few minutes.
Alternative REO Financing
If financing REO properties with hard money loans or conventional mortgages isn’t right for you, then there are some alternatives. For investors who own rental properties that have equity in them, you generally have two alternative options for REO financing.
Alternatives to REO financing include:
Cash Out Refinance
A cash out refinance occurs when investors take out a new loan on an existing property to extract equity from that property. Investors refinance for more than their current mortgage and receive the difference in cash. Typically, you need 30% to 40% equity in your property to qualify.
Home Equity Line of Credit (HELOC) or Home Equity Loan (HEL)
A HELOC is a revolving line of credit that an investor can draw from and only pay interest on the portion they use. Generally, you need 20% to 30%-plus equity in your home to qualify. A HEL is different than a HELOC because it gives you a lump sum of money based on the equity in your home. You generally also need at least 20% to 30% equity in your home to qualify.
Tips for Buying an REO Property
Generally when you purchase an REO property, you need to have your financing lined up before you make an offer on the property. This is so you can move quickly and compete with all cash buyers. Another tip is to bring a contractor with you when you view the property so you know what kind of condition it’s in and the estimated cost of repairs.
“The best bet is to keep an eye out for properties that hit the market through sources like HudHomeStore.com and other auction sites. You can also check with banks to see if they offer any direct sales on REO properties before they are listed with a real estate agent. ” – Nancy Brook, MBA, Broker & CEO, Billings Best Real Estate
“You should be prepared for the REO process should you decide to go down this route. Banks generally make for pretty inflexible sellers. The bank generally won’t agree to make additional repairs, pay for closing costs, and will tend to operate on their own timeline.” – RJ Winberg, Real Estate Agent, OC Real Estate Guy
Financing REO Properties: Frequently Asked Questions (FAQs)
How Are REO Properties Different Than Pre-foreclosure Properties?
REO properties are properties that have been foreclosed on by the lender and were not sold at an REO sale or auction. This is the last step in the foreclosure process. Pre-foreclosure properties are properties where the owner has defaulted on their loan but still has the option to catch up on payments and keep the property. It’s the beginning stage of the foreclosure process.
To learn more about pre-foreclosure properties, the process, and where to find them, check out our guide on how to buy a pre-foreclosure home.
Where Can I Find REO Properties?
You can find REO properties in online directories such as Auction.com, through a real estate broker, and on REO lender sites. If you’re interested in learning more about how to find REO properties, check out our in-depth guide on How to find REO properties for sale. It describes more about the foreclosure process, what to look for in an REO property, and how to find them.
Are REO Loans More Expensive Than Conventional Loans?
Generally, investors use hard money loans or conventional loans when financing REO properties. Conventional REO loans offer the same rates and terms for REO properties and non-REO properties. However, hard money loans generally have higher rates than conventional loans and charge more lender fees, which makes them more expensive than conventional loans.
Financing REO properties is generally done with two types of loans: hard money loans and conventional mortgages. Hard money loans offer quick REO financing 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 or owner occupants.
Hard money loans are generally the preferred financing option for REO investors, and LendingHome offers hard money loans for financing REO properties. They offer interest only payments and can close an REO loan in as quickly as 10 to 15 days. You can prequalify online in just a few minutes.