Residential Property 1 to 4 Units - Conventional
ICS offers conventional residential loan programs for 1 to 4 unit investment properties that are NOT owner-occupied. Residential conventional loans are mortgages that are provided by a bank, credit union, savings institution, or other traditional financial institution and are secured by a first lien position on the subject properties being financed. The collateral may be any type of residential 1 to 4 unit property. These loans are typically best suited when purchasing or refinancing investment properties including single family residence, duplex, triplex, and fourplex. In most cases, a conventional loan is best when the hold period is no less than 3 years. If you intend to own the property less than 3 years because you are flipping the property or rehabbing the property with intent to refinance within 3 years, a short-term bridge loan is likely a better option for you.
Conventional Lenders typically have maximum LTVs of 75-80%, while some lenders can stretch up to 85% in limited circumstances for especially strong borrowers. Borrowers should expect to have “hard cash” equity invested in purchase transactions, while being able to maintain a post-closing liquidity sufficient to service their debt for several months and an overall net worth equal to or greater than the loan amount (although there may be some flexibility).
Conventional Loan Features
Term Length/Amortization: The length of term and amortization depends heavily on the institution providing the funding as well as the property type. Terms can vary from 3-30 years with amortizations ranging from 10-30 years. Depending on the way the loan is structured, it may “balloon” at the end of the term, meaning at the loan balance will need to either be refinanced or paid off; otherwise the loan is self-amortizing, meaning that the loan will be fully paid off when the loan matures, so there is no loan balance to pay off (unless the loan is prepaid before it matures).
Prepayment Penalty Structures
Prepayment penal structures vary greatly depending on the institution funding the transaction. It may be structured as Yield Maintenance, Breakfunding, Declining (or step-down) prepayment penalty, or may be specially structured to suit a construction or mini-perm loan.
Declining (Step-Down) Prepayment Penalty: A declining prepayment penalty may be structured in a variety of ways, but always has the same feature of the prepayment penalty lessening by 1% per step with the last 3-12 (or more) months open to prepay or refinance without penalty. These are usually offered on shorter-term loans (i.e. 5-10 years), but could potentially be offered on longer terms as well. An example of a 5 and 10 year declining prepayment penalty would be the following:
- 5 Year Declining: 5% of loan amount if prepaid in the first year, 4% if prepaid in the second year, 3% if prepaid in the third year, 2% if prepaid in the fourth year, and 1% if prepaid in the fifth year, also represented as 5-4-3-2-1% or 5% declining.
- 10 Year Declining: 5% of loan amount if prepaid in the first or second year, 4% if prepaid in the third or fourth year, 3% if prepaid in the fifth or sixth year, 2% if prepaid in the seventh or eighth year, and 1% if prepaid in the ninth or final year, also represented as 5-5-4-4-3-3-2-2-1-1% or 5% declining.
Conventional Loan Servicing
Conventional Loans are typically serviced by the funding institution, the originator, or a third party servicer. The Master Servicer is responsible for day-to-day loan servicing practices including collecting loan payments, managing escrow accounts, analyzing financial statements inspecting collateral and reviewing borrower consent requests. All non-performing mortgages are usually sent to the special servicer. The special servicer is responsible for preforming customary work-out related duties including extending maturity dates, restructuring loans, appointing receivers, foreclosing the lender’s interest in a secured property, managing the foreclosed real estate and selling the real estate. Under some situations, master servicers subcontract some of their responsibilities to a primary or sub servicer in order to uphold the servicing standard when they need additional assistance.