Sub2 2nd Mortgage
if i were to purchase a 100k property from a distressed owner who had a 40k principal balance at 8% and took it sub2, could i open a heloc or take out a 2nd mortgage on that property?? i'm not talking about private money, but an institutional loan of some nature.
i have this situation where i purchased a property by taking it sub2 two years ago at 145k and it's now worth about 260k. having taken it sub2, what are my options for extracting some of that equity without disturbing the existing financing??
Its not clear why you just dont refinance. Why not?
don't want to refinance, b/c of the favorable terms of the existing first mortgage, esp b/c of the original mortgagor's immaculate credit and owner occ status...
Isn't 8% actually kind of high? It is a small balance so refinancing for less than 80% sounds good or whatever balance would keep your payments under rent received.
not for me, 8% is low,. there is also a prepayment penalty on the existing loan which i'd rather not pay. and there would be lots of points on the new loan. so, just assume that refinancing isn't an option, is there a way to put additional debt on a sub2 property?? has anyone ever done this??
Prepayment penalty and loan origination points are tax deductable. Thats a plus. lol.
so what if it's tax deductible?? i don't see where that even enters into it. its cash going out. phone bills are tax deductible, but i don't dial hawaii and leave the phone on for a month just to generate costs. tax deductible only helps when it's a phantom expense like depreciation. we are still talking about several thousand dollars that come right off the net operating income, which reduces the cap rate of the property. bottom line, that's bad. lower costs are better. these are costs.
There is no legal reason you cant get a second under these conditions. From a practical point of view I suspect that the major lenders will turn you down. Easy way to find out is to approach one and make an application.
I would think that a hard money lender may give a loan in 2nd position. I don't think a major lender would because all the transactions would show up on the property report and they wouldn't like what they see.
Just my 2 cents
I agree with Jay. Once the lender finds out through the title work that you have taken the property SUB2 they will likely turn you down.
The other thing is that with that type of equity in a property you should be able to get a favorable loan no matter your credit. Obviously you know your situation better than I do but I might talk to at least a half dozen local banks and see if they will loan to you and if not, what can you do so that they will the next time you come in.
Hope this helps[ Edited by myfrogger on Date 11/24/2003 ]
in all honesty, i probably will heed everyone's advice and just refi the loan at a later date, when my credit is a little cleaner. i don't need access to that equity at this time, but i was just curious what would happen if i ever wanted to do this. i suppose it just won't happen is the answer, unless i get a private lender willing to take a 2nd mtg.
thanks for all the replies, btw...
I am not sure you could get a hardmoney lender to give a second from my experience they always want to be in the first position.
right, not hard money via a broker, but maybe a private lender... an individual.
MrsMeltzer gets HELOCS on the properties that she takes sub-2. Where are you . . . . .
These nice folks want to know your secret approach!
BAMZ
Hold on a second...don't give up yet. I love HE Loans and HELoC. What we do is buy properties for cash, rehab, rent and then get 70% LTV HELoans. They are super cheap ($250 or less) and have amortization periods of as much as 20 years usually.
To your question....why not do this. Go ahead and talk to a bank and tell them that's there's a 1st on the property but that you would like to pay it off with the proceeds from the loan. So, if you're extinguishing that debt and there are no other clouds on the title, I don't see why they wouldn't do that.
At 70% LTV and a $260k mkt value that's a $182k loan. Payoff the $145k first (I think that's the number you used) and still have $37k left over for yourself. And, if your credit is decent, you can get a HELoan (at least in my area) for about 6.5% on a non-owner occupied investment property.
I worked as a manager in a mortgage co for three years and have done deals such as this for other investors.
To recap, you want to take a heloc out on the property that you purchased subject to.
We have to look at this from the underwriters point of view in terms of is it a smart loan for the lender to execute and if so why ?. In this particular case most underwriters will turn this loan down do to the fact that the first mortgage company will demand to be placed in first position to the heloc. Now, the problem with this is that once the first mortgage company catches wind that the proplerty has now been sold and their loan not recovered they will with the speed of light place into effect their due on sale clause if in deed they have one.
Having said all of that, the best and only way to pull the equity out using conventional terms is by refinacing the entire mortgage at the new appraised value. Most mortgage companies usually will allow for 75-80% loan to value. Make sure that the appraisal that you are using to prove the value is as current as 3 months from the time you are refinancing as well.
Lastly, as far as the points and closing costs involved, they can all be rolled into the financing at closing with your out of pocket expensive only amounting to what you paid to have the appraisal executed for the Cash Out Refi and in some cases a credit check. If your numbers are accurate with you owing 145k on the first and the house now appraising at 260 you and your closing costs to be estimated at around $1500 to 2k you will still show a more than positive ROI.
PS. Your interest rate depending on credit would be around 6.5% or if you decide to pay the points down your interest rate would increase an eighth for every quarter point you discounted. I hope this has been helpful.