When it comes time to pay off a hard money loan, the process isn’t as simple as paying off a traditional mortgage or car loan, for example. In fact, a hard money loan, also known as a private mortgage, is typically a complicated process, even when it comes to attempts to secure a payoff statement. For this reason, you should know what to expect before you borrow from a private mortgage lender. Seek transparency when it comes to how to pay off a hard money loan and consider the following scenarios:
Hard Money Loan Payoffs
First of all, the pay off amount of a hard money loan includes more than just the outstanding balance. To find out what the amount is, you need to get a different statement than the one your lender has been sending you every month. Ask for a payoff statement. Some states refer to this as a beneficiary statement. Depending on who your lender is you can access this information via a request using the Internet or an automated phone systems. For other lenders, you may need to put the request in writing and send it via certified mail. Tip: Make the request early in the process to avoid delays in paying off the hard money loan.
Hard Money Payoff Fees
When you receive your payoff statement, there will most likely be a payoff fee added to the outstanding balance. However, the payoff fee is sometimes paid upfront in the hard money loan process. Work with a lender who is up front about their payoff process. Tip: Borrowers who use an attorney to assist in the process of paying off a hard money loan get the loan paid off faster because there is no room for mistakes.
Getting a Subordination Agreement
This agreement is needed if you wish to leave in place a second mortgage while obtaining a new first mortgage refinance loan. Based on security instrument filing date, Mortgages have priority over each other. You can only have first lien position with a new first mortgage if you get permission from the current second lien holder to do so with a subordination agreement. The lender has the right to grant or refuse the request and will likely charge a subordination processing fee. Tip: The escrow company typically makes this request. Be sure to get a personal copy of the request and answer from the escrow company.
If you are behind on your first position loan and need to obtain a second trust deed or a second mortgage, you need a reinstatement statement. A senior lien officer will provide a written statement to the escrow company or title company with the amount needed to bring the lien current. Tip: As with all paperwork in the hard money loan payoff process, request this information early on.
Junior Lien Permission
Before adding a junior lien, you may need to request permission to do so by the first position loan. This is protect your cash flow which could easily be depleted by paying off another loan. Tip: Without permission, you could be in breach of contract which could result in the senior lien calling in the entire loan amount.