What is an Acceptable Ratio Between the Balances of First and Second Mortgages?

In order to obtain a hard money second mortgage, you'll need to know the acceptable ratio between the balances of the first and second mortgages. In general, private money and hard money second mortgage lenders want the principal loan amount between the first mortgage and the second mortgage to be at a maximum 5:1 ratio.  

5:1 Ratio for a Hard Money Second Mortgage

Let me explain how this works. 

A real estate investor owns a $1,000,000 property with a $500,000 first mortgage in place. They contact FCTD requesting a $100,000 hard money second mortgage. That’s a 5:1 ratio between first and second mortgages. That works.  

• $500,000 first mortgage
• $100,000 second mortgage 
  (5:1 Ratio)

This is acceptable because it both fits within the 5:1 preferred ratio, and is at 60% CLTV, another parameter that I covered in a different blog post. While a 3:1 ratio is even better, a 5:1 will work most of the time.  

What About a 10:1 Ratio For a Hard Money Second Lien? 

Over the years, I’ve received dozens of calls from borrowers requesting small, hard money second mortgages where the ratio between first and second is 10:1 — or even 20:1. When I say small loans, I’m talking anywhere from $7,000 to replace a septic system, up to $100,000. (Our preferred minimum loan amount is $150,000.) 

10:1 and 20:1 ratios don’t work for a couple reasons: 

1. Small loans amounts under $100,000, or even $150,000, take just as much time, — if not longer —than larger loans. Usually, smaller loan amount borrowers are less experienced and have more questions than a seasoned investor borrowing $1 million, who has taken out dozens of hard money loans over their real estate career.
2. Let's say a hard money lender issues a $50,000 second mortgage behind a $500,000 first mortgage (10:1 ratio), or a $50,000 second mortgage behind a $1,000,000 first mortgage (20:1). In the event of a foreclosure, they’d spend a bundle in legal fees foreclosing out their $50,000 position. They’d either have to pay off or service the debt of the first mortgage as well. It’s a case of spending a lot of money ($500K to $1 million in the above example) to simply salvage the initial $50,000. 

Conclusion

If you’re looking for a hard money second trust deed, 5:1 is an acceptable ratio between the balances of the first and second mortgages. That number makes sense to hard money lenders. It protects them from wasting time on a small loan, or shelling out excessive costs to salvage a minimal amount of money, should they have to foreclose on their second position.