The Devil Is In The Details (Documents)

The Devil Is In The Details (Documents)

Beyond the loan contract, you’ll find a collection of supporting loan documents the private lender may require prior to closing. Most lenders will pull them together or order them as part of the loan file. However, these documents may come up at any point between the initial application and closing.

Proof of insurance

You will be required to maintain certain kinds of insurance for a portion or the entire length of the loan. While insurance will not take effect until closing, you will need to have it set up with coverage “bound” and provide proof of insurance as a supporting loan documents.

Depending on the loan size and type of loan, the lender may require additional insurance from you and your business. This provides further assurance that they will get their loan repaid should you suffer some kind of loss.

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Defining payoffs and reinstatements

There are several kinds of liens that may delay closing, including liens against:

  • The subject property
  • Other loan collateral
  • Your business

The lender may require that you pay them off or, if delinquent, pay the current prior to closing. The private lender will require you to provide supporting loan documents in the form of a payoff or reinstatement statement from the current lienholder.

You can let the private lender request it or speed up the process by doing the legwork yourself. Make any requests in writing, preferably certified mail if the lender doesn’t have an online portal.

  • A payoff is a document from a lienholder specifying the exact amount to pay off the lien in its entirely. The payoff is not the balance on your statement. Payoffs include items not on the statements, like delinquent tax and insurance escrow impounds, legal fees, title fees to create and record documents to release the lien, and any other advances that the lender may have made prior to the payoff request.
  • A reinstatement is a statement from the lienholder providing the exact amount due to bring the delinquent loan current. A reinstatement is required if you are adding a junior loan to an existing loan. You may need to bring the senior loan completely current if it is delinquent.

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A note on timing payoffs and reinstatement documents

Depending on the type of lien, the lienholder may send these documents with a few days. Or it could take weeks. While an escrow company often handles this step, that sometimes means they request the payoff at the last minute. Sometimes this even delays the closing. A higher than expected payoff may derail the transaction entirely if it impacts the loan-to-value criteria. You will also want to review the statement to ensure it’s accurate and notify the private lender immediately not.

Many times private lenders will push to obtain the payoff earlier in their due diligence. If a property is delinquent, the current lender may have to jump through a few hoops to figure out how much they’re owed. Often they will need to reach out to vendors who haven’t yet sent invoices. This may include an appraiser to have the property re-valued for foreclosure, an attorney, incurred trustee fees, etc. All of this takes additional time.

Further, payoffs for government liens such as an IRS lien, state tax liens, child support liens, etc. may take many weeks or months.  If these liens exist, you will need to allow additional time and expenses. Government lien payoffs rarely come in at the value stated on the recorded face of the document and frequently lead to unpleasant surprises.

Subordination agreements

If you are obtaining a new first mortgage refinance loan and currently have a second mortgage that you wish to leave in place, you will need a subordination agreement from the second mortgage lienholder.  This is because mortgages have priority over each other based on the filing date.

You should prepare yourself for the second lienholder requiring more information about the new first mortgage. They will want to know the terms of the new mortgage. They are allowed to refuse if they feel this increases their risk in your investment. The escrow company typically makes the request and coordinates between the second lienholder and your private money lender to get the agreement granted.  They will record the agreement along with the new first mortgage loan.

Junior lien permission

Many commercial first position loans require you 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. Violating this loan covenant could result in the senior lien calling the note due because of a breach.

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