In the past few years I could take almost any deal to my banks that had a 1.2 DSCR and 80% LTV and it was a done deal. They didn’t ask any questions, nor did they care if it involved the seller holding paper. All they cared about was the fact that they were on the line for 80%. Had a meeting with my banker yesterday and he mentioned something interesting to me and this is the first sign that anything had changed with lending standards at my local bank.
He stated that from now until further notice if there was any seller paper involved that they would have to underwrite the seller, to determine the financial position of the seller, before the deal could close. And the bank’s rationale was that if they had to foreclose, they absolutely do not want to be in the real estate business. And by having a strong seller in second position that person would presumably assume the defaulted loan in an attempt to recapture his equity if there was a foreclosure, because typically in a foreclosure once the first lien holder is paid off there’s nothing left for the junion positions.
Basically I’m wondering if anyone else’s bank does this kind of underwriting the seller stuff, if seller paper is involved. It’s not really that big of deal to me at this moment, but I could see where it could possibly be a deal breaker if the seller isn’t financially sound.
Also, my banker said to me that if any seller paper was involved that the first 5 years of repayment to the seller had to be interest only. They didn’t want me paying down any principal on the seller’s note. This I just can’t seem to get a grasp on. How does me paying interest only on a second note give the bank more security? Any ideas?