Second Position Loan on SFR Stated/Stated Just Funded

Before moving forward with Hard Money Commercial underwrting, I wanted to go over a concrete loan that I funded. From time to time, I will go over real loan cases to move from theory to practice. This loan was funded as a second position, stated income, stated assets loan, interest only with no prepay.


This loan was complicated for a number of reasons:
- Owner Occupied
- No Prepayment Penalty
- Loan Amount
- Loan Position
- Use of Funds
- Employment Status

At the same time they were couple of positives:
- Credit
- Loan To Value



Working with the Mortgage Broker and helping him understand all the potential challenges became very important. Fortunatly, we were able to communicate effectively and enough equity was available in the property to make the transaction possible. Challenges that we addressed:


Employment: One of the two borrower was self-employed for a short period of time. While we don't verify income we want to be confortable.

Use of Funds / Proceeds: Funds would be used to finance the above referred business. The combination of both new business and need for operating cash more challenging to approve.

Loan Position: A second position is not bad, but in this trouble lending times, every aspect of loan becomes important. A first position is always better than a second. However, the borrower was not interested in a new first since they had a loan with a fixed interest rate bellow 6%.

Loan Amount: The loan amount needed was higher than the loan amount of the loan in first position. We would have preferred doing a new first loan, but borrower had a great rate for his first.

Prepayment Penalties: In Hard Money lending prepayment penalties are, in numerous cases, part of a loan. They help provide investors and funds guarantied returns. In this case the borrower wanted to have the flexibility to refinance in 6 months as their financial position will be changing.

Occupancy Status: in some cases it can be an issue due to maximum APR authorized by law. When loan amounts are small and/or interest rates are high then we run on the maximum APR allowed by the law. In addition, we need to be carefull on the number of maximum points that can be charge as they will be included in the APR. As a second position in this case we had to charge a higher rate

Compensating factors wer the LTV after all we ended up making a loan at a 60% LTV. Who would not want to do it? Credit was reasonable for a Hard Money lender, mid 600s.