Loan Scenario – 85/15 Seller Financing Plus Hard Money Second Mortgage

A homebuyer secured a seller-financed first mortgage at 85% Loan-To-Value (LTV) and asked if FCTD could provide a hard money second mortgage for the down payment, closing costs and moving expenses. In essence, they were asking if FCTD could help with a zero down payment transaction comprised of an 85/15 seller financing, plus hard money second mortgage debt stack.

The short answer is, “No, this isn't something we do.”

However, I want to elaborate because FCTD receives several similar zero down payment, hard money second mortgage loan requests each week. I want to give people the right information to better spend their time and energy.

Let’s get started…

Reasons Why a Hard Money Mortgage Will Not Work

I’m going to briefly discuss why a hard money second mortgage is not the path to financing your next home purchase.

Business Purpose Loans versus Consumer Purpose Loans

First off, most hard money lenders provide business purpose loans for real estate investors, secured against an investment property. When I say MOST hard money lenders, I mean 95% are only in the business of providing business purpose loans.

Buying a primary residence or second home is a consumer purpose loan, with an entirely different set of both state and federal regulations. Most hard money lenders don’t operate in the consumer purpose market. The exception is California, which does have a few lenders offering consumer purpose hard money loans. In most other states, it’s next to impossible.

65-70% Maximum Loan-To-Value (LTV)

If you found a hard money lender in your state offering consumer purpose loans, they would most likely limit the Loan-To-Value (LTV) (the first mortgage divided by the property value or purchase price [whichever is lower]), or Combined Loan-To-Value (CLTV) (first mortgage plus second mortgage, divided by the property value or purchase price) to 65-70% LTV or CLTV.

For the 85/15 debt stack, the seller financing is at 85% LTV, with the homebuyer asking for a 15% down payment using a hard money second mortgage, taking the CLTV to 100%.

This is impossible because the maximum leverage a hard money lender would take on is 70% LTV, while the seller financing is already at 85% LTV.

Where to Look for Down Payment Funds

A gift of equity or restructuring the debt stack are two ways a homebuyer could better spend their time and energy securing down payment funds.

Gift of Equity from a Family Member

If you don’t have the funds for the down payment, closing costs and moving expenses, you should ask a family member for a gift of equity for the funds. Family members are the primary source of gift funds for purchasing a primary residence or second home.

In conventional loan transactions, the family member will need to provide a letter stating that the funds are a gift, and not a loan to be repaid over time. The family member must also provide account statements to document where the funds will come from. They’ll need to provide evidence of the outbound wire to escrow, and the escrow officer will need to show receipt of funds received (or proof of a cashier’s check received by escrow).

I understand that most people don't have a family member who can and will wire $150,000 to help them buy a home. That’s where the next option comes into play.

80% | 20% Conventional Mortgage (1^st) Plus Seller Carryback (2^nd)

If you can qualify for a conventional mortgage, check with your mortgage lender to see if your first mortgage allows a seller carryback in second position. A seller carryback is when the seller provides financing and collects monthly payments. Some conventional lenders allow a 100% CLTV seller carryback. Others are restricted to 95% CLTV, while some don't allow it at all.

If the seller carryback is allowed by your first mortgage, this first lender will lay out the terms. Every situation is different and it’s best to know the terms will be accepted by the first mortgage lender prior to negotiating financing terms with the seller.

Conclusion

Buying a new home with zero down payment can be challenging. An 85/15 seller financing plus hard money second mortgage debt stack is not the solution to close on your next home. Hard money lenders make business purpose loans to real estate investors on investment properties — not consumer purpose loans against a consumer’s primary residence.

The best place to look for down payment funds for your new home is from a family member in the form of a gift of equity, or with a conventional lender that allows seller carryback financing in second position.