There’s an SBA Lien on My House
Am I Going to Lose My Home in a Default?
So you’ve defaulted on your business loan, and the SBA lien on your house is making you feel uneasy. Are you going to lose your home via foreclosure?
The simple answer is this: it depends on the numbers.
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 give 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. If you do not have an SBA lien on your house and are in default with your SBA lender, you are luckier than most, and contact us for a free consultation.
The SBA lender’s lien secures a “position” on your home to ensure repayment should the loan enter default. Frequently, their lien positions are subordinate to other encumbrances on your home, like your primary mortgage for example. To know whether or not you are in jeopardy of losing your home, it’s critical to quantify the value (equity) of the SBA lender’s lien as soon possible to determine the level of exposure you have.
If saving your residence is a priority, this calculation is the single most important thing you can do if you find yourself in default on an SBA guaranteed loan in which the lender has filed a lien on your home.
Fortunately, this calculation does not require a law degree or a course in advanced mathematics.
Here is the most definitive method to determine whether or not your home is at risk of being liquidated by your lender.
- Determine the liquidated value of the residence. Get an appraisal, but initially, you can complete a quick valuation on https://www.zillow.com just to get an idea of the value.
- Determine current balance of mortgages/liens/encumbrances that are filed ahead of the SBA lender’s lien. (Primary mortgages, HELOCs, etc)
- Subtract the answer to Step 2 from the answer to Step 1.
This straightforward equation gives you an excellent idea of the value of SBA lender’s lien position. Remember, the only way that the SBA lender can forcibly obtain any value out of your home is through foreclosure and auction – a process that requires the SBA lender to pay off any primary mortgages ahead of them. That’s why we use Liquidated Value as a benchmark, rather than Fair Market Value and the lender knows this as well.
The bank will unquestionably perform the very same calculation to determine whether or not their lien is worth pursuing aggressively – they are required by SBA protocol to liquidate any of their collateral that’s deemed valuable, and therefore must determine its value through their due diligence – you must do the same. When a new client engages our services, this is almost always one of the very first tasks we perform.
So what kind of number is considered to be valuable? From our experience, the banks will take aggressive action, or will actively seek to be compensated solely based on their lien position (setting aside the personal guarantee, which is dealt with as a separate calculation) if their liens are worth $50,000 or more. Remember that the foreclosure process, in most states, is a time-consuming and costly affair, and these banks aren’t interested in pursuing this route unless they will recover enough money to recoup their legal expenses and apply a substantive amount to the principal balance.
It is extremely important to note that there’s some variance in this number amongst the SBA lenders that we deal with, and while most lenders will give borrowers the time and opportunity to settle this lien, we have seen some that expeditiously pursue foreclosure. Some states make it easier for lien holders to foreclose than others, which changes their calculation and lowers the “threshold” for what they determine to be worth pursing. Additionally, while you should always obtain your own appraisal, the lender is always going to be required to order theirs separately. That means that there’s likely to be a slight difference between your appraisal and the bank’s.
All the more reason to determine the value of the SBA lender’s lien as soon as you foresee trouble with your loan.
Let’s break the steps down into further detail:
For Step 1, we are going to obtain a residential real estate appraisal by a certified appraiser in the state in which the property is located. We use a national company that automatically connects us to appraisers where we need to obtain a valuation. You can easily find a residential real estate appraiser in your area by searching on Google. I highly suggest you call a few different appraisers, and make certain they are confident in their ability to provide a liquidation value full inspection report (they visit your home), using foreclosure and REO properties as comparison properties. These appraisal reports will cost you anywhere from $200-500 depending on the scope of the work and the area, and will probably take 2-3 weeks to obtain the finished report after the appraiser conducts their inspection of your home. Let’s use an appraised liquidated value example of $500,000, as determined by a certified residential appraiser.
For Step 2, we are going to review any and all mortgage notes/encumbrances that were filed before (or “ahead”) the SBA lender’s lien. The most common situation we deal with is having one primary mortgage ahead of the SBA lien, so we’ll use this scenario as an example. Check your most recent mortgage statement to see what is currently owed – keep in mind your SBA lender will also require a copy of this statement when it comes time to negotiate. We will use a principal balance of $400,000 in this example.
For Step 3, just subtract $400,000 from $500,000, and you come up with a figure of $100,000. That is, the SBA lender’s lien has a value of approximately $100,000, which based off our benchmark, means that the lender will seek to be compensated for their position, or they will pursue foreclosure of the home. Why wouldn’t they? Even after paying off the balance of the first mortgage ($400,000) in a foreclosure, there would still be a significant amount of recovery value for them to collect.
So now you know how to determine the value of your SBA lender’s lien accurately. I can’t impress upon you enough the importance of doing this necessary due diligence as soon as possible, so you have as much time as possible to figure out how you’re going to get this lien removed.