Something is in the air right now because I’m getting several calls each week for owner-occupied residential hard money second mortgages from homeowners all throughout California. I’d love to help the people out but owner occupied hard money second trust deeds are nearly extinct due to increased regulations and lack of trust deed investor appetite for making these loans.

Yesterday, I received a request from a homeowner in the Bay Area who needed $80,000 to pay off credit cards that financed their daughter’s recent wedding. The credit card payments of $2400/mo had become a major burden on their finances and it would be a welcome relief to get an $80,000 hard money second mortgage at 12.00% with an $800/mo payment.

But, at the moment, we couldn’t find an owner occupied hard money second trust deed investors willing to do this loan because they were currently at 64% LTV on their first mortgage. Most of the second trust deed investors we work with will go up to 65% or 70% Combined Loan To Value (CLTV) on second trust deeds. If we’re already at 64% LTV, we’re basically maxed out already on just the first mortgage. Plus, the ratio of the balance of the first mortgage ($675,000) and proposed second mortgage ($80,000) was approximately 9:1. Most second trust deeds are capped at a 5:1 ratio, preferring to be at a 3:1 or 4:1 ratio.

I recommended they inquire with a local credit union about a Home Equity Line of Credit (HELOC). Been there, done that. The credit union already denied their HELOC application because their FICO score was too low at 665. The maxed out credit cards brought the FICO score down from 750 to 665.

What about borrowing from a friend or family member? Not an option. Relationships can get ugly and they didn’t want to go down that road.

The third option would be to take out an $80,000 loan against their 401K. They hadn’t thought of this but decided to check with their plan administrator. 401K loans are a last resort but in some cases they make sense.

My logic behind a 401K loan in this case are as follows:

  • Their 665 FICO score is too low to qualify for a HELOC or a cash-out Jumbo mortgage (720 FICO is usually required).
  • Within 1-2 months of paying off their credit cards, their FICO score should jump back up to the 730+ range since the only active account on their credit report will be the $668,000 first mortgage.
  • Their house is worth $1,050,000 and they owe $675,000 on their existing mortgage.
  • The new jumbo loan would come in at $760,000  (72% Loan-To-Value)
  • Ideally, they’ll only have the 401K money out for 3-4 months until it’s repaid by the new first mortgage (if all goes according to plan).

Second mortgage credit, whether a bank, credit union or hard money is still very limited.  Banks are not doing many second mortgages and hard money lenders definitely are not making many second mortgage loans, especially against owner-occupied properties.  Borrowing from friends and family can become a nightmare if things unexpectedly go south. The last option is to borrow from oneself with a 401K loan, which may be the least stressful option.

We at First Capital Trust Deeds are not big advocates of 401K loans, but we’re also aware that the hard money second mortgage that these Bay Area homeowners were seeking wasn’t feasible. With a 730+ FICO score in a few months, they’ll have several lending options to choose from. They just need a bridge to get there and maybe the 401K loan is the best way to make it happen.