Private Money Loan in 2nd Position

[Troy DeLong]

For our FLIP projects, we are usually using a Hard Money Lender for 80% of the purchase price and 100% of the rehab cost (on a draw schedule). In an effort to use NONE of our own money, we raise the other 20% (roughly) from a Private Money Lender. Just like with an institutional lender, we secure this PML's loan / Note with a mortgage on the property we're purchasing. 

With that though, pretty much every HML that we've come across does NOT want to see a secondary lender (20% PML) on the closing docs (2nd mortgage being recorded at closing), even if they know this PML will be in SECOND position. This leaves us with only one option... Close with the HML, using our own funds for the 20% (roughly) and then doing a second closing shortly after with the same title company for our secondary lender (PML), in a sense "paying ourselves back".

Now, my question to everyone is, how do you go about this so that we don't have to use our own funds at all on the initial closing, but instead can use our PML's fund right from the start and offer them security (currently a recorded mortgage at closing) all while appeasing the main lender (HML) and not holding up closing?

Is this doable? I'm all ears. Thanks in advance. 

- Troy 

[Doug Smith]

Hi Troy, Several of the lenders/Banks I worked for earlier in my career did studies on loans and why they default. For instance, Norwest Banks did a study in the late 1980s on the job profiles that paid their loans the best and worst. The best...a Registered Nurse statistically. The worst...by far and it wasn't even close...clergy believe it or not. Like insurance companies, lenders use the law of large numbers to come up with underwriting guidelines. Now, to your question, default rates are exponentially higher the less someone injects of their own money into a deal. It's not that many of us won't allow a 2nd, but we don't want to see a 2nd to a super high CLTV. We also "source" the down payment funds, partially to ensure that they haven't been borrowed. That's one reason lenders ask for 2 to 3 months of bank statements. We want to see that you've been holding the money for a bit (seasoning). It's not the answer you want to hear, but it's the truth. The risk to us lenders is just too great to lend on extraodinarily high LTVs. I wish you well in your investing journey.