Hard money loans seem a wonderful opportunity for those who are shunned by the banks and need the money in a hurry - usually for quick fix or fast purchase. But commercial hard money real estate loans are also ridiculously expensive and when borrowers find themselves puffing up a hill to repay they’re in a fix.
The good news, as the Wall Street Journal blog on the subject pointed out in 2011, is that some commercial hard money real estate lenders will double over for you with flexible terms since they want you to repay the loan. Most don’t want to seize your property. The bad news is that hard money real estate loans are still horrifically expensive.
Hard money payoffs are also complex. It's important to know exactly what to ask for and what to expect when working with private mortgage lenders.
Here’s a run-through that gives you the basic terrain.
Know your repayment amount
As the “Borrower’s Guide to Private money loans” points out, the payoff amount for private mortgages is more than just the outstanding balance that appears in your account. It urges you to be wary of making the same mistake that most borrowers make in which they assume the balance which appears on their last statement is the amount to payoff the loan.
To find out the payoff amount, ask the lender for a "payoff statement" or “beneficiary statement”. Best is to make this request in writing (or retain a copy of your request if you fiel it by internet). Make the request for a loan payoff early. Do not wait until the escrow division turns up on your doorstep since they tend to wait until the last minute to make the request which leaves no margin for error if the request comes back inaccurate or with an unexpected amount. Hard money loan payoffs always take longer than you think.
The “Borrower’s Guide’ also urges you to put your request in writing and mail it by traceable means such as certified or overnight mail unless you decide to fax or e mail it in which case you’ll also want to ensure that the lender has received it. A good idea is to keep a copy for yourself.
Know your payoff fee and procedure
Some hard money lenders request part of the payoff fee for the commercial hard money real estate loans upfront. Others will add it to the payoff statement. You’ll want to find out ahead of time what your investor requires.
Subordination agreement: If you are obtaining a new first mortgage refinance loan and currently have a second mortgage loan that you wish to leave in place, you’ll need to obtain a subordination agreement from the second mortgage lien holder for the new mortgage to acquire a first lien position. Mortgages have priority over each other based on security instrument filing date. Your new first mortgage loan can only obtain first lien position (because it will be filed after the previous second mortgage) through permission from the current second lien holder.
The second lien holder may or may not grant this request depending on how risky he considers this transaction the. The investors will will want to know the terms of the new first mortgage they are being asked to subordinate to and will want you to provide a “subordination processing fee” before they start the process. It’s important to request this document immediately from the second mortgage lien holder as processing times can vary. The escrow company typically makes the request and coordinates between the second lien holder and your hard money lender to get the agreement granted. They will record the agreement along with the new first mortgage loan.
Review the payoff statement
Make sure that both you and the escrow company receive a copy if the payoff statement and review the statement for accuracy. Immediately notify your hard money lender in writing if you find errors.
Reinstatement statement: If you are obtaining a second trust deed or mortgage and are behind on the first one, you’ll need a reinstatement statement. This is a written statement from the senior lien servicer to inform the escrow company or title company the amount to advance to bring your senior lien completely current. Many mistakenly believe that they can provide the lender with a copy of their last statement. While this works well for current loans, it will not be sufficient for loans which are delinquent or in foreclosure. Lenders tend to deliberate longer over reinstatement statements and may not provide you with one altogether.
Junior lien permission: If you currently have more than one mortgage on your home, one--or more--of those mortgages are considered "junior lien mortgages." This term refers only to the age of the mortgage. Many commercial first position loans require borrowers to obtain written permission before adding a junior lien. This is wise since it also helps you repay your first (or other) loans. the senior lender does not want you to deplete your cash flow by paying another loan which could mean you would have less to pay them in the future.
The good news about commercial hard money real estate loans is that they can be closed in just a few days. The Wall Street Journal blog (2011) quotes Merrill L. Kaliser, co-founder of Longhorn III Investments, a Texas lender and broker who aptly sums up the experience of many when he says “there is no red tape”. On the other hand, hard money loans are undeniably expensive and can lead to foreclosure and bankruptcy.
The WSJ notes that government regulations and heightened surveillance have resulted in lower default rates in the last few decades (since the 1980s). Phillip Cuilan, a mortgage broker based in Freeport, N.Y., who connects borrowers with lenders says that he gives the borrower enough time to get out of the loan. Foreclosure is the last resort.
Some lenders also allow interest to be deferred to the end of the loan (interest is generally expected monthly). Most lenders follow a sequence of steps in order to avoid foreclosing on the property. Some may attempt to reach the borrower to find out the current status and disposition of the property in order to see if things can be worked out cordially. The penultimate step is the Notice of Default that triggers the legal foreclosure process.
Having said this, the best way to repay the loan, therefore, is to do some hard thinking beforehand. If you suspect that you may not be able to repay, you cannot - and dare not - afford to take out such a loan!
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