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Ever wonder why bank’s voluminous real estate loan
documents usually include a covenant that the borrower
has to accept which prohibits junior [or secondary
financing]? Most of the time, these covenants don’t even
have language that allows for secondary financing with
lender approval. They merely state that no junior liens are
allowed. In fact, the language is strong enough to imply that
placing a junior lien behind the bank’s 1 st mortgage constitutes a
default [most likely a curable one] {curable defaults are ones that
can be remedied, such as placing insurance on the property if the
current insurance expires or is cancelled, as compared to incurable
defaults which cannot be remedied (or, undone) such as the borrower filing a
Chapter 7 bankruptcy}. Placing a junior lien behind the bank’s 1st mortgage is
usually curable if the junior lien can be reconveyed and the property is put back in the same
condition [title wise, that is] as it was at the time the bank made its 1 st mortgage.
One might ponder why banks expenses compared to the loan request by the bank,
are so strict about not monthly requirement for the which, in turn, produces a
allowing junior liens. After all, loan in question [both lower monthly loan payment.
a junior lien is behind the 1 st principal and interest]. Many Many borrowers find that they
mortgage. In fact, some non banks have changed their have to come up with upwards
bank lenders actually prefer DSCR ratio requirement, of a 35% down payment as
subordinate financing since The Great Recession, compared to 25% [pre Great
because it is as though there from 1.1 to 1.35. This can Recession] in order to satisfy
is additional security – place a tremendous burden the 1.35 DSCR. Adding junior
another party has an interest on the borrower to have to liens may place the borrower
to protect; however, traditional come up with a larger down in the default provision of the
banks do not view it in the payment, in most cases, DSCR if the junior lien requires
same way. There are a few thereby requesting a lower monthly payments.
reasons for this. First, banks
Why Banks
Do Not Allow
Junior Liens
have strict underwriting
guidelines wherein they look
at the DSCR [Debt Service
Coverage Ratio]. The DSCR
is a ratio that analyzes the
cash flow after normal
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