Paying off hard money loans, or obtaining a payoff statement is not always as straight forward as you would think. Private mortgages are generally more complicated and serviced by small companies. It’s important to know exactly what to ask for and what to expect when working with private mortgage lenders.
Paying Off Your Hard Money Loan
Many hard money loans are refinancing an existing private mortgage which means in order to figure out the amount of the new loan, you must have an accurate payoff amount for the existing loan.
The payoff amount for private mortgages is more than just the outstanding balance. Do not make the mistake most borrowers make in which they assume the balance which appears on their last statement is the amount to payoff the loan.
To find out the payoff amount, ask the lender for a “payoff statement” or in some states referred to as a “beneficiary statement.” Some private mortgage lenders enable you to make this request on the internet, or via an automated phone system, but most will not be that sophisticated. If the loan is with a private investor that does not offer an electronic means to request the information, be sure to put a formal request in writing and make the request early in the process.
Make the request for a loan payoff early. Do not wait for the escrow company to make the request for a loan payoff because they will frequently wait until the last minute to make the request which leaves no margin for error if the request comes back inaccurate or with an unexpected amount. Hard money loan payoffs always take longer than you think.
Make your request in writing. Always make the request in writing and mail it by some traceable means such as certified or overnight mail unless the hard money lender has an electronic option to obtain it.
Most banks or commercial lenders will add a payoff fee to the payoff statement. A small number of hard money commercial lenders, however, will request payment of the payoff fee up front, and sometimes with a cashier’s check. Find out what your investor requires early in the process.
Subordination Agreements and Fees
If you are obtaining a new first mortgage refinance loan and currently have a second mortgage loan that you wish to leave in place, a subordination agreement will have to be obtained from the second mortgage lien holder in order for the new mortgage to be granted a first lien position, which they will require. This is because mortgages have priority over each other based on security instrument filing date. Your new first mortgage loan can only obtain first lien position, since it will be filed after the previous second mortgage, through permission from the current second lien holder.
This request may or may not be granted by the second lien holder. They will want to know the terms of the new first mortgage they are being asked to subordinate to and may refuse if they feel there is an increased risk to their investment. It’s important to request this document immediately from the second mortgage lien holder as processing times can vary. Most investors require a “subordination processing fee” to be paid up-front before they will start the process.The escrow company typically makes the request and coordinates between the second lien holder and your PML to get the agreement granted. They will record the agreement along with the new first mortgage loan.
Review the Payoff Statement
Make sure you receive a copy of the payoff statement in addition to the escrow company. Review the statement for accuracy, and notify the hard money lender in writing, immediately, if there is an error.
If you are obtaining a second trust deed or a second mortgage on your property, and you are behind on the first position loan, you will need a reinstatement statement. This is a written statement from the senior lien servicer to inform the escrow company or title company the amount to advance to bring your senior lien completely current. Many borrower s mistakenly believe they can provide the escrow company a copy of their last statement. While a copy of the last statement works for current loans, it will not be sufficient for loans which are delinquent or in foreclosure. Expect that private mortgage lenders will take longer to issue a a reinstatement statement.
Junior Lien Permission
Many commercial first position loans require borrowers to obtain written permission before adding a junior lien. This is done because the senior lender does not want you to deplete your cash flow by paying another loan which could mean you would have less to pay them in the future. Violating this loan covenant could result in the senior lien calling the note due because of a breach.