Draws are funds set aside to be dispersed later in the lifecycle of a loan. They are created so you can maximize the amount of funds you can access. It is money set aside from the total loan amount as agreed upon in the loan documents.
The draw amount is tied to the initial scope of work. As the value of the home is built back up through renovations, we can dispense more funds (draws) set aside from the total loan amount.
How do I request a Draw?
To request a draw, the following items are needed:
- The amount requested and a list of the completed items from the scope of work.
- Photos of completed work. In addition to the photos of the completed work, please also provide current pictures of the bathrooms, kitchen, shared spaces. In total, there should be about 10-20 photos submitted. If the property is on the market, a listing with photos will also be accepted.
- As a reminder, work must be completed before money will be dispersed.
- Receipts (formatted as a PDF or as JPG) for the work completed.
- Current Loan: The loan, and all loans held by the borrower, will need to be paid current before the funds are sent. (Draw requests can be made before the monthly payment, but funds will not be released until payment is made)
- The loan(s) held will also need(s) to have current hazard insurance and flood insurance, if applicable. (See Insurance section)
Submit items 1-3 to Letisha by emailing firstname.lastname@example.org.
Draws will be processed the same day up until 2pm MST. All draws received after 2pm MST will be processed the following business day. You can always follow-up with a call to 480-779-9779. If you do not hear back from us by the end of the day, please reach out. It may mean we did not receive the request.
What is a scope of work/budget and how does it relate to my Draws?
A scope of work is an itemized list of the renovations you will be doing on the property. It is submitted before a loan is funded. A scope of work with accompanying cost breakdown for each item constitues a budget.
Note: If your draws budget is above $20,000, each item on the scope of work will need to have an estimated cost. Using the scope of work/budget, we help create a draws budget. When doing draws, the scope of work guides how much money will be disbursed for each item completed. If a line item is overbudget, it may not be reimbursed in full.
If the budget needs to be modified, please talk with your lender to see if the scope of work can be renegotiated. In addition, you may be able to do a loan modification to receive more funding for draws.
When can I request a Draw?
Draws can be requested at any time after closing. Keep in mind that draws are designed to be given after work has been completed*. The draw process does not cost anything and, in most cases, does not require any type of inspection beyond the photos submitted. For most loans, borrowers will aggregate the costs of renovations over a few weeks to create a draw. Most borrowers take about 3-5 draws over the lifetime of the loan.
Bear in mind, the loan(s) held by the borrower must be current on interest and outstanding fees to take a draw. In addition, current insurance must be secured for all loans held by the borrower.
The Draw exception: Draws including appliances, cabinets, windows & doors
Typically work needs to be completed before funds are dispersed. Appliances, cabinets, windows, and doors are the exception to this rule. After purchasing appliances, but before delivery, we can provide 50% of the cost of the appliance, cabinets, windows, or doors. Once on site, the rest of the budget for appliances, cabinets, windows, and doors can be dispersed.
When requesting a draw for purchased appliances, cabinets, windows, or doors please send receipts. Photos of the installed items will also need to be sent.
When are funds available for an approved Draw?
If approved, funds will be sent to the bank account on file by the next business day by 2pm MST.
At times, we may approve a draw, but not for the amount requested. We will reach out to you if we do not approve the entire amount. The approved funds will still be sent next business day. The approved amount can always be contested, or another draw request can be made to secure additional funds.
If you do not hear from us within a day of your request, please contact us again. The request may not have been received.
Can the Draw funds be sent to my contractor?
No. Since the loan is created in your name, the draw will be sent to your bank account. We can send the funds to a different account under your or your entity’s name if needed. Please update the bank account information on file when you do your request.
A contractor can intiate a draw. The borrower will always be kept up to date on the status of the draw.
How do draws affect monthly interest payments?
For our loans, interest is only charged on the money that has been lent out. Therefore, as more money is dispersed in the form of a draw, the interest charged will also go up.
As an example, let’s say there was a loan for $600,000 with a $200,000 holdback for draws and no money has been taken as a draw so far. That would mean only $400,000 has been disbursed so far. For easy math assume the yearly interest rate is 12%.
The monthly interest payment would be $4,000.
There is a trick here. To find the monthly interest rate, take 12% and divide it by 12 for each month. Each month 1% (12%/12=1%) of the funds dispersed is due as interest. Now knock off the last two digits of the dispersed funds and that becomes the interest amount. A loan with $235,700 dispersed has a monthly interest payment of $2,357. A loan of $456,921 has a monthly payment of $4,569.21.
The math is a bit more complex with midmonth draws. Using the example above with the $600,000 loan, let’s say a draw of $100,000 was taken on the 16th of a 30-day month. Now the total funds disbursed is $500,000, not $400,000. The $100,000 increase would mean a $1000 increase in monthly interest for a whole month. Since the draw happened exactly halfway through the month, the interest added to next month’s payment is ½ of $1,000 or $500. The total interest payment now becomes $4,000 + $500 or $4,500.
Automatic payments: Everything you need to know
Automatic payments pull at the beginning of the month for interest and any outstanding fees. You can choose the day for these payments (1st-9th of the Month), but the payments are typically pulled the first workday of the month.
Automatic payments are by far the easiest way to make loan payments and are a great way to safeguard against late fees. A statement will be sent on the 25th of the month. On the 27th a reminder will be sent for the schedule amount to be pulled (or the Friday before if those days fall on the weekend). Scheduled payment can be canceled by 4 pm MST the day prior to the date of the scheduled payment. Email Pam at email@example.com for any changes. Manual payments can be made instead of an automated payment.
We suggest ACH payments be canceled when within 2 weeks of payoff to avoid double payment for the last month of interest. A new payoff statement can also be requested if a monthly interest payment is made. In case where excess funds are collected at the time of payoff, they will be refunded. Refunds are sent within 3-5 business days after payoff.
In the case that a payment does not go through (NSF), there will be a $25 NSF fee added to the account. We will reach out to you to arrange payment in these cases. If a payment was mistakenly taken by us, we will refund any NSF incurred to the borrower.
Late Fees: What are they?
If a loan is not paid current each month by the 10th, it is considered late. A late fee is generated for 10% of the interest due. For example, a late interest payment of $5,000 would create a $500 late fee. Late fees only are charge on the interest portion of last month’s payment. For example, a payment of $5,000 with a $250 inspection fee due would also create a $500 late fee.
If a loan is in a late period, it is imperative for the loan to paid current promptly. Loans more than 30 days late can go into default creating increased costs. See Default.
Why did my payment amount change?
There are two main reasons payment amount changes.
Last month’s payment was under or overpaid. When a loan closes, title often miscalculates the amount of interest to charge. The first payment will then be lower or higher than normal. More than half of the loans we service have this error.
There was a draw on the loan.
See How do draws affect monthly interest payments?
When are statements sent out?
Statements are generated on the 25th of the month or the Friday before, if the 25th is on the weekend. If, for any reason, a statement is required prior to the 25th, let our team know and we can send a statement early.
If the loan is on recurring payments, a message will also be sent out on the 27th stating the scheduled amount pulling from the bank account on file.
Loans with interest reserves
Reserves are funds set aside to pay interest. Reserves are almost always set up at closing. Reserves are often set up for experienced investors with multiple properties. When interest is being paid by reserves, a statement will be sent as normal; however, payment will be made from the reserves. If the reserves expire by the next month, we will reach out to arrange future payments.
Do I need fire/property insurance?
Every loan requires property insurance. It protects the asset and is a condition of the loan. The type of insurance can vary. Contractor’s insurance is the most robust insurance available for renovation and construction, while a fire insurance policy would be a more minimal option. Both are acceptable under the terms of the loan.
For any insurance policy purchased, the following must be added to the Mortgagee Clause:
BOOMERANG FINANCE SUB-REIT, LLC
c/o of Boomerang Capital Partners
P.O. BOX 20130
Mesa, AZ 85277
Do I need flood insurance?
Flood insurance is only required for flood zones. We run flood reports for all properties we fund. If the property is in a flood zone, we will reach out before the loan funds. The property must have active flood insurance for the duration of the loan. If flood insurance expires, is canceled, or is not secured, the loan may be placed into default. See Default
When securing insurance, the following mortgagee clause must be added
BOOMERANG FINANCE SUB-REIT, LLC
c/o of Boomerang Capital Partners
P.O. BOX 20130
Mesa, AZ 85277
What is the process to file an insurance claim and receive a payout?
The process for insurance payouts varies with each claim. The steps below are general and may not incorporate all requirements. Please reach out to us when an insurance claim is required so we can walk through the particulars of the claim.
- File a claim with the insurance company.
- Once a determination is made, they will send you a check.
- Sign the back of the check and mail the check to our address: 2152 S Vineyard, Suite 105, Mesa, AZ 85210
- If the property is purchased using an entity, print the name of the entity and your capacity in the entity (ie Member).
- Please notify us when the check has been sent so we can look out for it.
- Send pictures of the damages and the repairs made to Pam at firstname.lastname@example.org.
- Send receipts for any items purchased.
- If a police report was filed, also send this report.
- Once we receive the check, we will deposit the amount and then disburse the fund to the bank account we have on file.
What happens if I do not get insurance?
If the loan property does not have insurance, coverage is allowed to lapse, or coverage is canceled, the loan may be put into default. Having active insurance is a term in the loan agreement. See the default section for potential consequences of breaking the loan agreement. In addition to the consequence of default, the loan may have forced insurance placed on it. Notably, the cost of forced insurance will be higher than the market rate available and will be added to loan fees. Forced flood insurance, for example, can have a premium of $9,000 per year.
How do I request a payoff?
To request a payoff email Gabrielle: Gabrielle@boomerangcapital.com
In the payoff request, please state the requested payoff date.
Please also cc the contact at title. Any individuals cc’d on that email will also receive the payoff statement.
Overpayment at closing
Overpayment at closing is common and happens for a variety of reasons. In any case, we will only keep the amount owed and refund the rest. This refund happens 3-5 business days after the property closes.
Below are common reasons why title collects too much money
- The property pays off at the beginning of a month. Let say we provide a payoff statement to title before the monthly payment is made. If the payment is sent, then the payoff statement will request more than is owed. And if the payoff statement is not updated, then the payoff will collect too much. To avoid this either cancel automatic payments when you request a payoff or request an updated payoff sent to title.
- Title miscalculated interest owed. Our payoff statement will include an expected close date. The interest charged is based on the expected close date. If closing is prior to that date, and title does not adjust the interest, then too much interest will be collected. There is no easy way to avoid this issue. A settlement statement will show interest collected so one could challenge the number of days of interest collected. Easier would most likely be to wait for a refund from us. Refunds for these mistakes are about $50-$300.
Underpayment at Closing
Underpayment at closing is rare and is often a very small amount. If this happens, we will contact title or you as the borrower to settle any remaining interest. Underpayment is usually an issue with title miscalculating days of interest owed.
Our goal is for you to stay on course for your loan. We want you to succeed just as much as you do. A successful project will allow you roll over your investment into future projects. However, unforeseen events, an over budget project, and disorganization can all contribute to being stuck and not current on your loan. Loan modification is the last resort for us to protect borrowers in these situations. In most cases, early and transparent conversations with our team can help avoid the worst penalties as things start to get off track.
What does it mean to be in Default?
When a loan is put into default your interest rate can increase substantially (typically 27-29% but refer to your loan documents for the rate), backdated to the date your loan was put into default. It also starts the process toward foreclosure.
4 Major reason the loan can be placed into Default
4 Major Reasons a Loan Can Be Placed Into Default
- The loan is more than 30 days late (see Late Fees).
- The loan is past its maturity date. For most loans a loan can be extended for an additional 3 months for a fee (refer to your loan documents). If the loan is no longer eligible for an extension, or a loan extension is not signed, the loan will be placed in default.
- The property has outstanding liens.
- Examples: There are outstanding state or local taxes, contractor liens, and sewer/electrical bills that threaten the ownership of the property
- You break terms of loan including:
- illegal activity (i.e. fraud).
- Not securing hazard insurance for the property and flood insurance for properties in flood zones.
- Someone is living in the property.
If the loan stays in Default
A default will result in increased interest and additional fees. It can quickly make an otherwise profitable deal turn into an increasingly unprofitable venture.
Default is a last resort for us to protect investors. It can result in foreclosure of the property to pay outstanding costs we’ve incurred. A default notice should be taken seriously. Please reach out to rectify the loan.
If the loan is in default for more than 30 days, it may be sold to a non-performing loan servicer. Once the loan is sold, we will no longer be the point of contact. The terms of the loan would be kept as stated in the loan documents with the loan at a default interest rate until the loan is trued up, the property is paid off, or the property is foreclosed.