What are the Requirements for a Hard Money Second Mortgage?

This article outlines the requirements for a hard money second mortgage that you, as a borrower, need to have ready prior to applying for financing. The better prepared you are with your financial statements, personal and business documents, and property information, the faster you'll be approved and closing on a new hard money second mortgage.  

My company, First Capital Trust Deeds (FCTD), has originated several hundred hard money second mortgages since 2013. We’ve worked with numerous entrepreneurs, real estate investors, developers, and private lenders to move loans from initial application to funding. As experts in all aspects of second mortgages, we know how to optimize the approval process.

The documentation listed below is what successful hard money second mortgages require to get approved and funded. Some items may not pertain to your situation. However, you'll see what does apply, and can ready them prior to submitting an application. 

Hard Money Second Mortgage Application Requirements 

Before we dive into the requirements, I want to point out that I've written an article about hard money loan requirements, listing the general requirements and reasons why a specific document is required. The items below will just be a list of required documents for second mortgages without the detailed explanation.  

Individual Application Requirements

• Loan application
• Borrower’s authorization 
• Photo ID
• Two months bank statements — business and/or personal
• Credit report
• Background check
• Experience — previous real estate investment projects

First Mortgage Requirements

• Mortgage statement for the first mortgage
• Contact information for the first mortgage if a private loan
• Verification of Mortgage (VOM)
• Promissory Note
  Note: Some mortgages prohibit junior liens. They have due-on-sale language that accelerates the loan if a junior lien is recorded on the title. (See image below.)
  
  

Rent Roll and Leases

• Rent roll
• Leases with addendums
• Property management agreement 
• Rent receipts from the two most recent months

Entity Requirements

• Articles of incorporation (corporation) or articles of organization (LLC), or trust documents
• Bylaws (corporation) or operating agreement (LLC)
• EIN 
• Certificate of good standing
• Corporate resolution authorizing a member to sign for the loan on behalf of the entity
• Foreign entity registration
  (e.g. a California LLC borrowing for a property in Oregon may need to be registered as a foreign entity with the Oregon Secretary of State and have a registered agent in the state of Oregon.)

Insurance Requirements

• Proof of insurance 
• Acceptable coverage for liability and replacement cost
• Correct mortgagee/loss payee
• Flood Insurance if in a FEMA flood zone

Use of Funds 

• Supporting documentation for where the funds will be used, and for business or consumer purpose

Exit Strategy 

• Outline how and when the loan will be repaid (property sale or refinance)

Underwriting a Private Money Second Mortgage 

Once the application and supporting documents are received, the lender will order and review credit and background checks, verify liquidity, open title and escrow, and order a valuation. Many details are handled behind the scenes, including: 

• Verifying that the entity is in good standing
• Verifying borrower vesting and signing authority for the entity
• Checking first mortgage payment has zero payments over 30 days past due in 12 months
• Securing intercreditor agreement between first lienholder and proposed hard money second mortgage lender
• Ensuring the title is clear
• Checking that property taxes are current
• Ensuring no background of fraud or financial crime
• Verifying experience  

Each second mortgage has several unique circumstances to work through. No two situations are alike, which can make hard money second mortgages a challenging puzzle to put together. Or, if we’re lucky, a relatively easy puzzle to solve. 

Conclusion

If you're in the market for financing, you’ll want to prep and organize the above paperwork so you can submit a complete application for a hard money second mortgage with supporting documentation. The better organized you are, the quicker the possibility of approval and funding, provided the appraised value comes back at the expected level. A little (or a lot of) planning goes a long way.