Meet Our Team
Why Choose Humboldt Home Loans
Overview
Pre-Qualify
Apply Now
Calculators
My Account
Contact Us
Overview
Monthly Payment
Payment Schedule
Extra Payment
How Much Can I Afford
How Much Can I Borrow
Rent vs Own
Overview
Profile
Loan Status
Conforming & Jumbo Loans
FHA
USDA Guaranteed Rural Housing
VA Loans
Investment Property Loans
ARM Loans
Construction Loans
Sub Prime Loans
Market Analysis
Mortgage News
Upcoming Seminars
Shop Rate, Or Not?
Credit Basics
Forms
Links
HomeAbout UsLoan CenterProductsTip SheetsResources

EQUITY FINANCING . . . SECONDARY LOANS

Updated:         June 4, 2018

A BIT OF HISTORY BEFORE WE DISCUSS TODAY’S EQUITY FINANCNG

While home values were escalating, often at double digit levels, homeowners borrowed their equity for all kinds of reasons. Many homeowners were bombarded via the mail encouraging them to borrow. And many did, some several times as their property value increased. While there are very good reasons for acquiring secondary financing (which we will discuss a bit later), many of the offers made via the mail or by tele-marketers represented dangerous situations. In many cases, loans were made up to 100% of the home’s value. As home values stabilized and, in some cases, declined, homeowners found themselves “upside down” meaning that they owed more than the home was now worth.

Many of those past "sales pitches" were being "sold" as a solution to debt consolidation. The "pitch" was that the second TD was a lesser interest rate than their current credit card or installment debt and and the secondary loan would result in a reduction in monthly payments. It was a seductive offer. But, in retrospect, borrowers may have made some bad decisions. Credit debt, while sometimes overwhelming, if unpaid will not result in a foreclosure. On the other hand, if there is a default on a loan secured by the property (as in secondary financing), the borrower could lose their home via foreclosure. Thus, this form of secondary financing should not be encouraged, except under very specific purposes and then, only after careful loan counseling.

Those enticing solicitations typically indicated that "you have been approved for a loan up to $25,000" or more. The fine print usually contained a disclaimer that the offer is "subject to the approval of a loan application and accompanying information". Remember, if the offer sounds "too good to be true" . . . it usually is!

BORROW UP TO $25,000 to be used for home renovation or any other purpose (buy a car, take a vacation, etc.). In the past, most of these offers were for an FHA Title One loan or one of the "look alike" loans. While FHA loans are used only for home repairs, the "look alikes" did allow the funds to be used for any purpose. A borrower had to still qualify for the loan, in spite of the assertions to the contrary. The interest rate in most cases was fairly high, often ranging between 7 and 11 percent and there were costs for acquiring the loan, usually a minimum of two or three points and often higher. These loans have become less popular as more stringent regulations have been placed upon the lenders offering such financing. But a lot of homeowners did acquire these loans and faced some difficulty. (While mostly no longer available, we mention these types of loans because history has a way of repeating itself and we may once again see these loans emerge.)

There are Legitimate Reasons for Acquiring Secondary Financing

It is important that all aspects of such financing be reviewed and understood. We do not generally encourage secondary financing except for very specific purposes. More recently, secondary financing ahs become very difficult if not impossible to acquire. The UP TO 100% EQUITY LINE LOANS  are no longer available. While very seductive when being offered, the result has been properties that became over-encumbered. As indicated earlier, secondary financing can play a important role in some real estate transactions. One of the more frequent uses of a second trust deed is to reduce the Loan-to-Value of a purchase to 80% or less in an effort to avoid a mortgage insurance payment. For instance . . . the buyer's $25,000 cash available is insufficient for the 20% down payment necessary to avoid Private Mortgage Insurance (PMI) on his $150,000 purchase. A solution might be to ask the seller to carry back a second trust deed for the $5000 difference to get to the 80% LTV (Loan-to-Value), thereby eliminating the PMI payment of approximately $65 a month.

Let's look at another typical use of a second TD. A potential buyer has a home to sell, from which he will realize $25,000 of net equity. While he has sufficient cash to purchase now, he wants to acquire a new fixed rate mortgage on the new purchase, and wants to pay down his new mortgage after he finally sells. If the seller is willing to carry a $25,000 second TD for a short term, the buyer can pay it off upon the sale of his property and have only the desired first trust deed encumbering the home.

The above scenarios represent a couple of excellent uses of secondary financing at the time pf purchasing a home. There are other reasons that current home owners seek secondary financing – for home improvements, to finance education, etc. These latter situations are generally financed via equity line loans (known as HELOC loans). Until recently, lenders have been reluctant to accept any form of secondary financing at home purchase time. Lenders are now offering to provide a second trust deed loan at the time of financing a first trust deed purchase transaction. The two loans must close escrow together and be from the same lender. Perhaps this is an opening that will allow future seller financed secondary loans?

The above scenarios represent a couple of excellent uses of secondary financing in the purchase of homes. While the above represent some reasonable decisions, in this world of less flexible lending environment lenders are reluctant to accept any form of secondary financing at home purchase time. We recognize that there are many good reasons for current home owners to use secondary financing . . . to make home improvements, to finance education, etc. Equity loan financing is likely to be the selected form of said financing which is typically limited to a maximum Loan-to-Value (LTV) of 80%. The loss of home values will impede many homeowners from acquiring any form of secondary financing.

With credit scoring so important with this type of financing, a borrower is encouraged to identify their FICO score(s) before entertaining the notion of acquiring secondary financing. While secondary financing can be critical in some situations, consumers must be careful that they are not persuaded to encumber their homes without clearly considering the full consequences of doing so. Some of the offers for secondary financing are "too good to be true" . . . and they are. Be very cautious and seek good counsel. Call us at Humboldt Home Loans and we will discuss all of your loan options, including secondary financing.

 

Webpage/equity financing