- Review: LendingHome
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LendingHome is a direct lender; the company uses its own capital to originate loans. After closing, LendingHome either sells whole loans to institutional investors or issues “Platform Notes” to individual investors, which provide access to the loan’s underlying cash flow.
Individual investors are able to browse all investment opportunities, select ones that interest them, and specify the investment amount they wish to commit. $50,000 is the minimum required capital to invest on LendingHome’s retail investor platform, but participation in individual Platform Notes can be as low as $5,000.
LendingHome isn’t a crowdfunding real estate site where investors pool money into loans and once fully funded, the loan is made. The loans on LendingHome are already funded before being offered to investors.
Co-Founder and CEO Matt Humphrey put it this way:
“We don’t use the term crowdfunding internally because that isn’t really what we do. Rather, we set out to rethink the entire lending process and apply technology to make it better for borrowers and investors through a closed loop end-to-end residential lending space marketplace.”
LendingHome mainly offers bridge loans for fix-and-flip residential rehab properties but also has a test program in place to potentially offer consumer home loans, an online alternative to traditional bank mortgages.
A bridge loan is a short-term mortgage used to acquire a property quickly. Generally this financing is used until permanent financing is found, the home is resold, or it is rehabilitated and then resold. The LendingHome bridge loan program is designed specifically for property investors looking to finance their next flip or rehab.
The advantage for bridge loan borrowers is speed — borrowers answer a few questions and can get a customized rate in minutes. While it’s quick and easy to apply, LendingHome has a rigorous documentation and underwriting process that fully vets a potential borrower’s creditworthiness. If everything checks out, the loan closes in 10–14 days.
As of April 2016, LendingHome has funded over $550 million in mortgage loans and returned over $200 million in principal and $20 million in interest to investors.
Each mortgage originated by LendingHome is assigned a risk grade and a rate. This “coupon rate” for each loan is determined by a loan’s corresponding risk grade:
|Risk Grades||Gross Coupon Rate|
LendingHome keeps a servicing charge equal to 10% of the coupon rate. The servicing charge is the sole fee incurred by investors on the platform. Thus, the net coupon is equal to 90% of the gross coupon rate (e.g., a 10.0% gross coupon note is expected to pay 9.0%). This fee structure is identical for both accredited individual investors and institutional partners.
How It Works for Investors
Accredited investors who want to invest sign up through the website and can view investment opportunities immediately. Upon signup, you’ll be able to browse notes, and once you’ve selected a first investment, you’ll be guided through a verification process to confirm your eligibility to invest on the platform. Per SEC rules, your eligibility as an accredited investor will need to be verified by LendingHome’s online process through Accredify, a third party that specializes in accreditation verification (which generally takes 2–3 days).
From there, you’ll be able to connect your bank account, specify an amount and pull funds directly into your secure LendingHome account. LendingHome makes two micro-deposits to verify your bank account within two days. Once your funds are available, you can buy into a Platform Note and specify how much you want to invest. You’ll receive a principal interest in a Platform Note and start earning cash flows that day.
Essentially, there are four steps to participate:
- Create an account at www.lendinghome.com.
- Verify your accreditation.
- Link your bank account.
- Fund your account, browse notes and invest.
Loan Terms for Borrowers
- Rates start at 7%
- Property type limited to 1–4 residential unit properties
- Up to $1,000,000 ($75,000 minimum)
- Term of 12 months
- Fee of 2.5% (minimum of $2,500)
- Up to 80% Loan-to-Value
With LendingHome, processing costs are typically less than 1/3 the industry average, and the savings are passed on directly to the borrower.
What About Investment Risk?
Each Platform Note is an unsecured, limited-recourse obligation of LendingHome Funding Corporation that corresponds with an underlying mortgage loan originated on the LendingHome platform.
This means payments under the Platform Note are made “when, as, and if, payments are collected by LendingHome under the underlying mortgage loan, net of transaction costs.” In the case of delinquency or default, LendingHome handles all servicing and you still participate in the payoff.
LendingHome takes measures to mitigate risks associated with investing in Platform Notes:
- LendingHome records a first lien position against the underlying real estate asset for the total amount of the loan. This lien has priority over all other liens or claims on a property in the event of default. At a weighted average loan-to-value of 70%, there is significant equity the borrower stands to lose before your loan is negatively impacted.
- Lender’s Title Insurance Policy is obtained on each loan to protect your financial interest against loss due to title defects or third-party liens.
- LendingHome is named as first loss payee on the Hazard Insurance policy to ensure your loan is protected in the case of unintentional damage or destruction by fire, smoke, wind, hail, theft, vandalism or another similar event. No subordinate liens are allowed to be recorded against the property to simplify the special servicing process.
LendingHome provides loans for the underserved — rehabbers who find it difficult to acquire traditional loans in a timely manner. The risk of default might be higher or might be lower; there’s simply not enough history to know.
As of March 31, 2016, LendingHome claims that of the 2,750+ loans which have been issued, they have a 6.74% delinquent rate (60+ days), two foreclosures, and historical losses of under 0.01%.
LendingHome currently lends in Arizona, California, Colorado, Connecticut, Florida, Georgia, Illinois, Maryland, Michigan, Missouri, North Carolina, Nevada, New Jersey, New York, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, Washington, and West Virginia.
|Fees||1.0% – 2.0%|
- Transparency — On the platform, you can view underlying documentation specific to each loan, including information on the borrower, property, loan terms and additional guarantees. And you can see the particulars of each note (when payments have been made, if payments have been missed, the status of the loan, current unpaid balance, etc.).
- Fees — For investors there’s no fee. For borrowers, there’s an application fee of $199 that’s structured as a refundable deposit on the standard costs of loan underwriting (e.g., ordering appraisals, background checks, flood certification, etc.). If you decide you want to withdraw from the process, LendingHome will do a full or partial refund of anything not yet spent. Fees, which vary by loan program and the rate and terms you select, are net-funded at closing. (For example, if you have $1,000 in fees to close on a $200,000 loan, you will be given $199,000 at closing.)
- AutoInvest — Investors can select individual loans or enroll in AutoInvest, where LendingHome automatically reinvests any available funds into any open notes that fit the program and specifications you select
- Investor Dashboard — You can monitor your portfolio’s financial performance, including a breakdown of loans by tier state, grade, etc.
- 12-month Term — As an investor, you commit your capital for 12 months. It may be shorter if there is a prepayment by the borrower, and it may be longer if the loan has any issues such as delinquency or default.
- Payment Terms — After payments are collected and applicable servicing fees are deducted, the remaining principal and interest is sent to investors as a pro-rata share of their participation in the Platform Note. Those funds are returned to your dedicated on-platform trust account where the funds can be either reinvested or withdrawn.
- Loan default process — If a default should occur, LendingHome handles the process of a loan default from beginning to end, including any special servicing involved in working out the loan and successfully recovering principal and interest.
Autoinvest program participants are given priority — before loans are listed on the platform. To withdraw capital from your LendingHome account, you must pause AutoInvest and wait until notes have been repaid and the funds are available in your cash balance.
|8.50% target net rate||10.00% target net rate||11.50% target net rate|
|A–C notes ranging from 6% to 9%||A–H notes ranging from 6% to 16%||D–H notes ranging from 9% to 16%|
- Prefunded — You don’t have to wait for your loan to be crowdfunded. LendingHome has already closed on all available loans with their own funds. You start earning interest the same day you invest.
- Immediate cashflow — You’ll instantly receive a principal interest in a Platform Note and start earning cash flows that day.
- Investment Diversity — Platform Notes start at $5,000 and enable you to diversify across any number of underlying mortgages within LendingHome’s Bridge Loan program.
- Customer Service — I signed up as an investor on the website and was assigned to a dedicated LendingHome Investor Relations Specialist who got in touch the same day with a phone call and email.
- Accredited Investors Only — LendingHome’s platform is open only to individuals who are U.S. accredited investors, which means you must meet certain minimum annual income or net-worth thresholds. The company verifies eligibility through third party accreditation services. Should your accreditation lapse at any time, you may be asked to return to the site and re-affirm your accreditation status.
- Gains taxed as interest income — Investments in LendingHome loans produce interest income, which is taxed at a higher rate than capital gains. (Interest income is taxed at marginal rates, whereas the maximum net capital gain tax rate is 20%.)
- Platform notes are not secured — While their corresponding mortgage is secured, the Platform Notes are offered in reliance on an exemption from the registration requirements of the Securities Act of 1933. (LendingHome is not required to comply with specific disclosure requirements that apply to registration under the Securities Act. Neither the Securities and Exchange Commission, nor any state regulator, has passed upon the merits of or given its approval to the securities, the terms of the offering, or the accuracy or completeness of any offering materials.)
- High minimum investment — $50,000 is the minimum required capital to invest on LendingHome’s retail investor platform. While that’s a sizeable investment, you can instantly diversify your holdings in up to 10 different Notes as the minimum investment per note is $5,000.
The traditional mortgage process is slow and inefficient. Using technology, LendingHome has sped up the process for borrowers while providing the opportunity for accredited investors to easily invest in residential real estate notes. In essence, their online platform efficiently connects residential real estate property borrowers and investors who want to lend them money.