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Do You Fund Hard Money Second Mortgages to Cure a Foreclosure on Owner-Occupied First Mortgages?
If you're seeking a hard money second mortgage to cure the foreclosure action on the owner-occupied first mortgage...
People in foreclosure often think they can refinance their defaulted mortgage with a hard money foreclosure bailout loan. This idea persists, since most real estate agents and conventional mortgage lenders still think hard money loans are financing for people with bad credit. Maybe 15 years ago that was the case – but today, hard money loans are more prevalent, and most lenders avoid making loans to borrowers with bad credit. At First Capital Trust Deeds (FCTD) we’ve seen our share of borrowers desperate for a hard money loan that can help them out of a foreclosure.
This article will cover what you need to know about foreclosure bailout loans, including:
It’s important to first understand the difference between business purpose and consumer purpose loans. I’ve written about this topic in another blog post you should definitely read. I also address this topic over and over on these pages so you can save time and focus your efforts in the right direction.
Nearly all hard money lenders only do business purpose loans, where the use of funds are for a business or investment property. Examples include:
Summed up, business purpose is for investment properties or mortgages where cash-out funds are going directly to a business account, with the borrower documenting the precise use.
A consumer purpose loan is where the use of funds is for personal expenditures. Examples include:
To make a consumer purpose loan, a hard money lender has to go to great lengths to document how the funds are used, and how the consumer can afford the payments. They also have to write the loan for 20 or 30 years, which most hard money lenders don’t like to do (12-month bridge loans are most common in hard money lending). During the underwriting process, the lender is preparing their legal defense in the event that the borrower defaults, initiates foreclosure proceedings, and causes the borrower to sue or file for bankruptcy. Hard money lenders who originate consumer loans are also documenting their future responses to a judge at trial.
As you can see, there’s a lot for a lender to consider when making a consumer purpose loan.
Business purpose loans, on the other hand, don’t have this level of legal liability. The borrowers are usually real estate investors, developers, home builders, or house flippers. They’re using hard money loans for real estate, not personal uses.
This is why I said nearly all hard money loans are for business purposes and very few are for consumer purposes. With consumer purpose loans, the risk to lenders is much higher than a borrower defaulting on payments. Therefore, hard money lenders focus on business purpose loans.
If you’re in default or foreclosure on a conventional mortgage at 4.00% on your primary residence, a hard money loan at 11.00% is not a viable solution. I wrote a blog post, Hard Money Loan to Stop Foreclosure on Your Primary Residence, covering the ins and outs of alternatives to hard money loans. Here’s a quick summary:
I think it’s better to always first work with your current lender on forbearance or a loan modification. Loan servicers have come a long way since the housing crash of 2007-2010. They’re better at helping borrowers keep their mortgage to avoid foreclosure.
If the first mortgage on a primary residence is 3-6 months in default, a small hard money second mortgage of $10,000 to $20,000 also isn’t a possibility. The main impediment is the income documentation and trial preparation a hard money lender would need to complete. In addition, most lenders have a minimum loan amount of $100K or $200K. Making a small loan is the same amount of work for much less pay. It’s not a wise use of their time.
If you can’t get a forbearance or loan modification, move on to friends and family for help. Ask someone you know for financial assistance.
If a borrower is in default on an investment property, they might be able to use a hard money loan to pay off the existing mortgage. However, borrowers can face many challenges and obstacles going this route.
If the current loan has been in and out of foreclosure for a few years, it’s going to be hard to find a hard money lender interested in paying off that loan with a new one. Habits can be hard to break, especially one of frequently being 30, 60, or 90 days late on mortgage payments.
Hard money lenders want to fund a loan and then receive on-time monthly payments – not have to call late borrowers and get an excuse or the runaround. However, if the default was a one-off situation, it’s more likely a hard money lender will consider making a loan to stop the foreclosure.
FCTD has seen both the repeat offenders who are in and out of foreclosure, and the one-off situations where something unexpected happens – like an illness or a large warehouse tenant filing bankruptcy and going out of business. Each of these situations have to be considered for their unique circumstances.
If you’re facing foreclosure on your primary residence, consider several options before pursuing a hard money loan: working with your current lender, asking friends and family for a loan, or simply selling the house. Hard money has the lowest probability of success and should be the last resort – despite what some real estate agents and traditional mortgage brokers think. Likewise for investment property owners: first work with your existing lender to keep that loan in place. If that’s not possible, check with hard money lenders, who may take out a loan for one-off situations, when the borrower is unlucky rather than undisciplined.
Sep 2, 2023 by Ted Spradlin
If you're seeking a hard money second mortgage to cure the foreclosure action on the owner-occupied first mortgage...
Feb 21, 2023 by Ted Spradlin
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Disclaimer: Information, rates, and pricing are subject to change without prior notice. All loans subject to borrowers and underlying collateral meeting First Capital Trust Deeds’ and/or assigns then-current underwriting criteria. Other restrictions apply.