How to Get an SBA Lien Release on Your Home
In every workout that I’ve been involved with, there nothing that elicits a stronger emotional reaction more than the threat of losing one’s home in a default.
Let’s face it, if you are a small business owner that has received SBA guaranteed financing, the chances are that the lending bank, in conjunction with the SBA, required you to voluntarily provide them a “deed of trust” or a mortgage filing against your personal residence. The terminology and exact type of document filed vary state by state, but the intent and purpose are the same. For this article, we will refer to these encumbrances simply as a “lien” filed against your home, and we will discuss scenarios under which you can get an SBA lien release on your home.
These liens have one simple function: they ensure that you, as the personal guarantor, pay back the loan in full because the threat of losing your house is a possibility in the event of default. If you fail to pay your loan, the lender can exercise its rights under the lien documents that you signed and take aggressive action against the property that they’ve secured to cover their potential losses unless of course, you can obtain an SBA lien release with their consent.
In this article, we are going to address some of the more common ways to get an SBA lien release without selling your home.
From our experience, most SBA lenders are reluctant to take aggressive action against homeowners, such as foreclosing, even if their lien has value. This is likely due to the SBA encouraging its lending partners to work with homeowners to work on repayment options in the event of default, and also due to the costliness and relative uncertainty of many foreclosure actions.
It is much more common that lenders prefer to be voluntarily paid for the SBA lien release rather than obtain value through aggressive action.
Let me repeat this very, very important point again: you can obtain an SBA lien release in exchange for an agreed upon payment amount that mimics what they would receive in a foreclosure sale. Remember, the only way that the SBA lender can forcibly obtain any value out of your home is through foreclosure and liquidation, they cannot achieve a “market value” sale.
Let’s break this down into two common scenarios:
- The bank’s lien has significant value
- The bank’s lien has no significant value, or negligible value at best
In Scenario 1, the borrower must keep in mind that the SBA lender does have an incentive to take aggressive action against the property, as it’s highly likely they would recover tens of thousands of dollars in a foreclosure sale, even after paying off any mortgages that are in a higher priority position. The point here is, the bank is going to play hardball and likely won’t agree to a release of their lien until they believe that they are being fairly compensated for it. We are always going to try and settle for the lowest possible dollar amount, using the liquidated value argument/approach, but remember that the SBA lender has all of the leverage in this negotiation, as they already have a lien, and you’ve already defaulted on the loan!
That being said, after determining the value of the bank’s lien, here are the two most widely used options to pay off an SBA lender’s lien that has value.
Option A: Obtain an SBA lien release through conventional home refinance.
Refinancing is the process of getting a new mortgage that restructures or pays off the existing liens on the home. The borrower must stand up to a credit check, income verification, and a fresh appraisal of the home in question. This is often inherently difficult because you are in this situation because you’ve already defaulted on an SBA guaranteed loan, however far from impossible, since many times defaulted SBA loans will not affect your credit.
Another potential roadblock using Option A comes to down value, and just how much a new lender is willing to refinance your home versus what the SBA lender stands ready to take to release their lien.
For instance, let’s say you owe $1,000,000 on a defaulted SBA guaranteed business loan. Your home appraises for $500,000, and you currently have a primary mortgage balance of $300,000.
The goal is to find a lender that’s willing to extend a new mortgage to you, paying off the first and paying as much as possible on the SBA lien. Assuming you have found a lender willing to lend you a standard 80% of the appraised value of your home (80% LTV), after paying off the first mortgage ($300K), you have roughly (less closing costs, fees, etc.) $100,000 to offer the SBA lender to release their lien. You must then be prepared to negotiate with the SBA lender – do they believe that the value of their position is worth $100,000? Do they think they could recover $125,000 or more if they initiated foreclosure? These are all points of negotiation that you must be prepared to face. Most foreclosures, especially judicial foreclosures, are expensive and time consuming. You are offering a cleaner, quicker way for the SBA lender to receive compensation for their lien position without them spending a dime. The lender cannot force you to find a fair market value buyer for your home – you should always be using liquidation value as a benchmark. Use these facts to your advantage when negotiating.
Option B: Pay off of lien through cash settlement
Can’t get approved for a conventional refinance? Consider looking into friends and family members who are either willing to gift or loan funds to you to remove an SBA lien on your home. The use of borrowed, or gifted funds is crucial for those who haven’t already settled or discharged their personal guarantee, as any of the guarantor’s available personal liquid assets would be subject to the personal guarantee agreement, and therefore the bank would want these funds in addition to being compensated for their lien on the home. This agreement can be structured within the framework of an SBA offer in compromise or negotiated directly with the bank if the personal guarantee has already been discharged or settled. If negotiated within the framework of SBA offer in compromise, you may even have the option of paying off the value of the lender’s lien over a period of five years.
At the end of the day, the SBA lender’s preference is alway going to be the option that provides the quickest conclusion, either through a refinance, or through a lump sum cash settlement – so long as the dollar amount accurately reflects the value of their lien.
If you’re negotiating with your SBA lender to get a lien removed from your home, one of your strongest arguments is that the only way they can forcibly recover value from their lien position is through a foreclosure and liquidation. The dollar amount they are willing to accept for a lien payoff should reflect this reality.
Scenario 2: The SBA lender’s lien has no value.
If you determine that the SBA lien release has no value, the process of lien termination becomes significantly easier. Remember that no matter what, a lender will not remove a lien from your home without some form of payment – as there must be an incentive for the lender to initiate their review process, bring it to their credit committee, and ultimately file the paperwork necessary to remove the encumbrance.
Consider this recent data point: a client of mine with a defaulted $1,000,000 SBA guaranteed PNC Bank loan had shut down his business, and filed for personal bankruptcy, which relieved him of his personal obligations, but did not remove the lien from his home. A year passes, and he decides he’d like to eliminate that lien. We had ordered an appraisal on his home, which indicated there was no value in PNC’s lien.
We approached PNC, with a copy of the appraisal we had ordered, along with a recent mortgage statement (indicating the balance), clearly demonstrating there was no equity in the home, and offered $3,000 for a release of their lien. Within 24 hours, we had received the paperwork from PNC, agreeing to release their lien in exchange for $3,000. See the mortgage release letter to see what this document should look like.
From my experience, in Scenario 2, $3,000 is the magic number that will induce a lender to terminate a valueless lien. It’s a large enough number that will grab the attention of whomever at the bank is handling this account. With this proposed number, they will be willing to put in the time and effort to review the file with their associates, have the paperwork drawn up, and ultimately file their lien termination. Anything less and you may not hear anything in response from your bank – it’s simply not worth their time to look into. Anything more is probably unnecessary (provided there’s no value in the lender’s lien) but it might be worth a bit more to you for the peace of mind if you are gaining no traction with the lender at $3,000.
If you have the knowledge of how the process works, and the resources to pull it off, it is possible to keep your home in an SBA loan default situation. Don’t fret, just do your due diligence, and determine which option is the most viable for you. The process is relatively straight forward, but the emotional aspect often take ahold of people, and they are unable to get through this on their own, not to mention many borrowers get taken advantage of by the lender who squeezes them for much more than the lien is worth. Beware of these pitfall and contact us for a free consultation.