A self-employed San Diego homeowner obtained a cash-out owner occupied hard money second mortgage from First Capital Trust Deeds.
Since the onset of the Credit Crisis in 2007, we at FCTD have worked with a number of highly creditworthy self-employed homeowners who needed a business loan to either buy another business or expand their existing business. Yet due to the tight bank business lending environment we’re presently in, these entrepreneurs have been denied credit by their long-time business bank for a variety of reasons. This leads these investors to seeking an alternative loan often in the form of a cash-out owner occupied hard money second mortgage against their primary residence.
Hard money loans are not ideal for business owners accustomed to working with their traditional commercial bank on a business line of credit or another type of business loan. Yet, at this point in the recovering credit cycle, there aren’t too many low-cost options for businesses that don’t quite fit into the A+ box that commercial banks tend to require.
That’s where hard money second mortgages come into play.
These loans aren’t for the faint of heart. The pricing is double or sometimes triple what highly creditworthy borrowers are accustomed to receiving with interest rates starting in the high 9.00% to the mid-13.00% range and closing costs anywhere from 4-7 Points. The Combined Loan-To-Value (CLTV) Ratio (Sum of the 1st mortgage + 2nd mortgage divided by the appraised value of the home) is usually limited to 65% with 70% on the rare high side of the spectrum.
With this owner occupied hard money second mortgage in San Diego, the borrower was able to get the money needed to expand their manufacturing business. Their preference was to buy new equipment with cash rather than go through their bank to obtain a line of credit. They had had a few credit hiccups during the downturn of 2008-2010 that would have posed a difficult obstacle to overcome when applying for traditional bank financing. So they chose the path of least resistance by using their home in Point Loma as collateral for a hard money second mortgage.
The trust deed investor who issued the loan had an appraisal done, did a sight inspection of the home, and even toured their business to get a better overall sense of how the funds would be deployed. Normally, this lender would only do a 36-month term on a business purpose second mortgage, but they elected to go with sixty months in order to give the borrower a longer window to start seeing the return on investment from the new equipment purchase.
Overall, the loan has worked out really well for both the borrower, who bought the new equipment, and for the lender who has been receiving an 11.00% yield on their $425,000 loan.
Owner Occupied Hard Money Second Mortgage Terms:
- $425,000 Loan Amount (55% CLTV)
- 11.00% Interest-Only
- $3,895/Month Payment
- 60-Month Term
- 12-Month Prepayment Penalty