Can I Get Hard Money Loan With Federal Tax Lien?
This BLOG On Can I Get Hard Money Loan With Federal Tax Lien Was UPDATED On May 31, 2017
Can I get a Hard Money Loan With Federal Tax Lien?
One of the best benefits of hard money financing is to pay off outstanding federal tax liens.
- Federal tax liens on credit reports will no doubt plummet one’s credit scores and most traditional lenders frown upon the fact that borrower’s have federal tax liens.
- Judgments and tax liens are the two worst derogatory item anyone can have on their credit.
- Many real estate investors are always short of cash and the last debt they think of paying is to Uncle Sam.
- The Internal Revenue Service does not mess around and want their money and they have the power to collect than any other collection agency.
- The IRS will not waste any time in garnishing wages, freezing assets, and most commonly, file liens not just on one property, but multiple properties of real estate investors owing them taxes.
Benefits Of Using Hard Money Loans?
When real estate investors think of hard money, they think of high interest loan shark funding and if they do not pay, thugs will come visit them personally at their homes. Many believe that hard money financing are only for people with bad credit who have no other means of financing. This is not the case. Hard Money Lending is a big business and is a great tool for many real estate investors, whether the investor has good credit, no credit, bad credit.
Many sophisticated high net worth individuals use hard money loans due to the following reasons:
- Great short term financing tool
- Most hard money loans close in less than 30 days
- Emergency funding where lenders can close hard money loans in a week
- Bank financing take a long time and many real estate investors need quick cash to fund a purchase, pay off an existing balloon loan, or cannot wait to start rehab on a fix and flip property
- Hard money loans is not balance sheet lending but rather asset based lending
- Pay off high interest debts
- Pay off tax liens
- Pay off judgments
- Purchase properties at auctions
Case Scenario On Hard Money Loan With Federal Tax Lien
Proper qualification prior to issuance of pre-approval is key. I recently made a mistake on a private money loan due to not properly qualifying a real estate investor.
- I submitted a hard money loan to an investor that trusts me.
- I knew the borrower personally.
- He is of all things a Real Estate Lawyer.
- He should know better, but I guess he for some reason thought such a major credit and title issue could slip by.
- It didn’t.
Issues With Federal Tax Liens On Credit Report
Here is the problem the federal tax lien was on credit report, and I for some reason didn’t look assuming the real estate lawyer would point out a $100,000 plus federal tax lien; and I know the guy.
- I looked at the credit report for mortgage history, other delinquent accounts, and of course the credit score.
- I didn’t search the public records section. The investor called me and pointed out the federal tax lien.
- How embarrassing.
- Public records such as tax liens, judgments, bankruptcies, foreclosures not reporting on credit report will be discovered because all lenders, including hard money lenders, does a third party national public records search through Lexis Nexis, Data Verify or other third party public search companies.
Due Diligence In Underwriting Hard Money Loan With Federal Tax Lien
The loan looked good, without the federal tax lien of course.
- The appraisal was around $250,000.
- The current mortgage pay off was around a $120,000.
- The Loan To Value or LTV was under 50%.
- Sounds like a great Private Money Mortgage.
Underwriting Hard Money Loans With Federal Tax Lien
Unfortunately, the borrower had a federal tax lien.
- It was for over $100,000. Now the loan didn’t look so good.
- The Federal Tax Lien would have to be paid off
- Federal Tax Liens and Judgments does not have to be paid off prior to closing
- Tax Liens and Judgments can be paid off at closing
- $100,000 plus $120,000 equals $240,000 plus fees and costs.
- We had an appraisal of $250,000.
- Can you figure out the LTV?
Now some federal tax liens can be paid off. If only this particular deal had a federal tax lien for $20,000 or a mortgage for $20,000 and a federal tax lien for $120,000, this would have been a very good Private Money Mortgage.
Processing And Underwriting Hard Money Loan With Federal Tax Lien
Remember the moral of the story.
- Hard money loan officers need to properly qualify borrowers.
- Borrowers need to disclose all information including tax liens and judgments.
- Hard money loans are asset based lending so there needs to be equity in the property.
- Look close at a loan before you submit it to an investor, and Private Money and Hard Money Mortgage need to have plenty of equity after the loan is made.
- In this case I didn’t look closely at the Private Money transaction because I knew the client.
- He was also in the industry so I did not expect him not to disclose something as relevant to the transaction as a federal tax lien.
It still baffles my mind why a real estate lawyer would actually pay for an appraisal to get a Private Money Mortgage knowing he had such a big federal tax lien. He is a Real Estate Lawyer and agent of a title insurance company. He must know something like this would show up.
Borrowers Who Can Benefit From Hard Money Loans
Hard Money Loan With Federal Tax Lien is not the only benefit for borrowers.
Reasons Hard Money Loans Benefit Borrowers
- Hard Money Financing is for short term financing normally interest only for six to 24 month terms
- Hard Money Loans is asset based lending and not balance sheet lending: Minimum 25% down payment
- Lenders are more concerned about the property than borrower
- Need equity/down payment to qualify for hard money loans
- No credit, low credit scores, bad credit, bankruptcy, foreclosure, short sale by borrower does not matter to qualify and no tax returns/income verification is required
- Hard Money Loans close in 30 days or less versus 90 plus days for bank and traditional financing
- Great tool for paying off balloon commercial mortgages
- Hard money lenders offer acquisition and rehab loans available in 50 states
Real estate investors who want to learn more about hard money financing, please contact Gustan Cho at 800-900-8569 or text Gustan at 262-716-8151 for faster response. We are available 7 days a week, evenings, weekends, and holidays.