Why Borrowers Obtain Owner Occupied Hard Money Loans
There are many circumstances which result in a borrower being denied a residential mortgage by banks and credit unions, causing the borrower to turn to residential hard money lenders in order to obtain financing on their primary residence:
- The borrower currently has poor credit
- The borrower has a recent foreclosure, bankruptcy, short sale or loan modification
- The borrower has less than 2 years of employment history with their current employer
- The borrower is self-employed
- The borrower needs a bridge loan for a primary residence
- The borrower is a foreign-national
Conventional Lender is Unable to Perform During Escrow
In some instances a borrower receives financing approval for a conventional residential mortgage, only to have the lender not be able to perform while in escrow.
At this point the borrower should consider obtain financing from a private money lender able to lend on residential owner occupied property. Private money lenders provide a much faster approval and funding process, which will help prevent losing the subject property.
Once escrow closes and the property is secured, the borrower will be able to refinance out of the hard money mortgage and into a lower cost long-term mortgage.
Owner Occupied Hard Money Loans: Business Purpose vs. Consumer Purpose Hard Money Loans
North Coast Financial is able to provide both business purpose (hard money consumer loans) and consumer purpose owner occupied residential hard money loans in California. Most hard money lenders will not even consider hard money loans for a primary residence. This is primarily because an owner occupied residential hard money loan:
- requires additional documentation
- requires additional regulatory licensing the lender does not possess
- is subject to extra regulations
- has mandatory rescission periods which increase the time to fund the loan
- has additional risks the lender must assume compared to investment loans
Business Purpose Hard Money Loans
A small amount of hard money lenders will provide business purpose owner occupied hard money loans but this is only beneficial to the borrower if:
- the borrower already owns their primary residence
- the borrower has a sufficient amount of equity in their primary residence
- the use of the loan proceeds will be used for some business purpose
Consumer Purpose Hard Money Loans
Very few hard money lenders will provide consumer purpose owner occupied loans (consumer hard money loans). A loan would be considered consumer purpose if it were used to purchase a primary residence or if a cash out refinance is taken out on an existing principal residence for personal reasons such as paying down credit cards or other debts.
Regulators define a consumer purpose loan as one in which the proceeds are used for personal, family or household use.
Qualifying for an Owner Occupied Hard Money Loan
Residential hard money loans for owner occupied homes are still subject to federal regulations such as Dodd-Frank which require the lender to verify the borrower’s income and expenses. Income verification is usually accomplished by providing the lender with pay stubs, W2s or tax returns.
The borrower is also required to keep their debt to income (DTI) under a certain ratio. The borrower’s existing debts including other mortgages, car payments, credit card payments and other debts will be considered in the ratio as well as the new proposed mortgage obligations (mortgage payment, taxes and insurance).
Owner Occupied Hard Money Loans are Intended for Short-Term Use Only
Residential hard money loans (for investment or owner occupied properties) are intended for short-term use only, generally 3-5 years. Especially in the case of an owner occupied borrower, North Coast Financial would require that the borrower has a reasonable plan in place to obtain long term financing.
This usually involves taking the necessary steps to repair credit in order to qualify for a conventional loan or postponing applying for a conventional loan until the mandatory waiting period after a significant derogatory credit event such as a bankruptcy, short sale, foreclosure or loan modification has passed.
The Fannie Mae minimum mandatory waiting period after a pre-foreclosure, bankruptcy or short sale used to be 4 years. The minimum mandatory waiting period for these events has recently been shortened to 2 years.
Owner Occupied Hard Money Loans for 2nds
If a borrower currently has a conventional bank loan (1st loan) on their property and has enough equity they may be able to take out a 2nd loan against their home. Homeowners often choose to take out a hard money 2nd against their property when they aren’t able to qualify for a Home Equity Line of Credit (HELOC) or a Home Equity Loan (HEL) but still need to borrow against their property’s equity.
The interest rate on a hard money loan is higher than on a HELOC but a consumer hard money loan would be considered a financially wise decision if the loan proceeds are used to pay off credit cards or pay down other types of high interest debt.
For more information on 2nds, please visit our Hard Money 2nd Mortgages and Trust Deeds page.
Private Money Lenders for Residential Owner Occupied Property
North Coast Financial is a private money lender for residential owner occupied property located in California. Contact North Coast Financial Now to inquire about an owner occupied loan.