New ‘second mortgage’ could help self-employed borrowers weather a recession

Business owners may be able to tap into their home’s equity through a “second-lien” loan, but at a higher interest rate.

By Jeff Lazerson | jlazerson@mortgagegrader.com | MortgageGrader.com | July 31, 2022

* Article originally posted in Orange County Register on July 28, 2022

Business owners may be able to ride out a possible recession by tapping their home equity, thanks to a new “second mortgage” product that will hit the market next week.

It’s kind of like COVID-19 Groundhog Day. Maintaining a qualifying income was a challenge for self-employed borrowers during the pandemic because they weren’t showing enough metal as business incomes declined.

On top of all that, who wants to touch his or her existing super-low rate first mortgage? Refinancing for a sorely needed, short-term cash infusion is an expensive and painful option.

Starting Monday, Aug. 1, Encinitas-based Fund Loans will be rolling out a new fixed-rate second mortgage, qualifying self-employed borrowers based upon varying calculations of the most recent 12 months of bank statement deposits.

If that’s not good enough, non-occupant co-borrowers are allowed to help you, similar to Fannie Mae guidelines.

You better need it badly because the rate is going to sting. Excluding settlement charges and loan origination points, second “trust deed” rates range from the high 8’s to nearly 13%.

Better rates are available through home equity lines of credit, or HELOCs. Most HELOCs have adjustable rates tied to the prime rate, which now stands at 5.5%, plus a profit margin of about 1%. Hence, a typical HELOC is significantly cheaper at 6.5%.

The catch is you might not be able to income qualify for the bank HELOC through tax returns and the like. So, the new Fund Loans second is for the beggars, not for choosers.

“Business owners for this loan are driven by need,” said Jon Maddux, CEO and Co-Founder at Fund Loans. “They don’t want to give up equity in their business.”

So, better to tap home equity.

Full disclosure: my firm Mortgage Grader is a mortgage broker customer of Fund Loans.

There’s lots of tappable home equity out there, defined as homes with debt equal to less than 80% of a home’s value. California leads the nation with $3.5 trillion in tappable equity, or 30.5% of the nations’ total, according to Mitch Cohen, director of public relations, marketing & communications at Black Knight.

Tappable equity totals almost $1.2 trillion In Los Angeles and Orange counties and nearly $204 billion in Riverside and San Bernardino counties.

The Fund Loans second can be used to borrow from $250,000 to $1 million. You need a minimum 680 middle FICO score.

Terms are 10, 15, 20 or 30-year fixed rates. Lower interest-only payments are offered on the 30-year term.

If you live in the home, you may be able to borrow enough to raise your combined first- and second-lien debt to 80% of the property’s value. Lower “loan-to-value” debt may be allowed for second homes, investment properties and even duplexes, triplexes and four-plexes.

U.S. citizens, permanent residents and foreigners with temporary visas are eligible.

You cannot put this second behind a first mortgage with a loan modification, forbearance or deferment, land contract of sale, negatively amortization or that’s privately held.

I wrote of a similar program in 2018. Shortly after I wrote of this inventive mortgage financing tool, it vanished from the market. That was one of the most timeless columns I’ve ever written. Calls and emails have come monthly, if not weekly since its publication.

I’ve inquired with other so-called non-QM or exotic mortgage lenders. Others may be adding this type of second lien to their menus. If you need it, grab as fast as you can. Here today. Gone tomorrow?

Or here today and cost you even more tomorrow?

The national average for the popular 30-year fixed-rate mortgage fell to 5.3% for the week ending on Thursday, July 28. (Staff chart)
Freddie Mac rate news: The 30-year fixed rate averaged 5.3%, a 24-basis point slide from last week. The 15-year fixed rate averaged 4.58%, a 17-point slide from last week.

Mortgage applications fell 1.8% from last week, dropping to their lowest level since February 2000, the Mortgage Bankers Association reported.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $647,200 loan, last year’s payment was $935 less than this week’s payment of $3,594.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages without points: A 30-year FHA at 4.625%, a 15-year conventional at 4.5%, a 30-year conventional at 4.99%, a 15-year conventional high-balance ($647,201 to $970,800) at 4.99%, a 30-year conventional high-balance at 5.32% and a 30-year purchase jumbo at 5.25%.

Eye catcher loan of the week: A 30-year purchase jumbo with the rate and payment locked for the first seven years at 4.25%, with 1 point.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

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* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.