The owner of this Orange County rental property wanted to tap $250,000 of the remaining $1,250,000 of equity in the home to pursue another real estate opportunity. The big problem, which has been a recurring theme in the FCTD loan portfolio pages, is that our borrower was self-employed and owned several other investment properties.
For those unfamiliar with the “plight” of the self-employed real estate professional and their limited mortgage borrowing options, they’re currently having a difficult time obtaining bank financing for their properties because they have so many tax deductions and write-offs. This leads to a lower tax liability (a good thing) and a lower Adjusted Gross Income (AGI). For those who apply for bank financing, they usually find that after 3-4 months of repeatedly providing financial documentation to the underwriters, they often get turned down for one reason or another and don’t want to go through the process again.
Therefore, by default, they go with a hard money loan, which may not be as attractive in terms of pricing. However, securing a hard money loan can be more reliable than bank financing at this point in the housing/lending cycle.
The owner had two small bank loans on the property with rates below 4.00%. Since there was still over $1,250,000 in equity, it made the most sense to leave the bank loans alone and do a $250,000 hard money third mortgage that could close within one week.
Hard Money Third Mortgage Loan Terms:
- $250,000 Loan Amount – 43% Combined LTV
- 10.50% Interest-Only
- 36-Month Term
- 6-Month Prepayment Penalty
- No Appraisal Necessary