Private money lenders for residential owner-occupied

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There are three reasons why only about 5% of all hard money lenders are willing to arrange loans for owner-occupied borrowers.

A. The requirement to verify the Ability To Repay (ATR) the loan by the homeowner.

B. The requirement to have consumer loans fully amortized and at least five years duration

C. The fear of not being able to foreclose on the property occupied by the home homeowner.

Can hard money lenders verify the Ability To Repay (ATR)?

On December 10, 2020, the Consumer Financial Protection Bureau (Bureau) issued rules about the Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule), making the lenders responsible for verifying the ability of the borrower to pay back the loan. Most hard money lenders cannot verify Income and expenses. Mistakes in the verification can cost the lenders the possibility of not collecting the money they invested and face criminal and civil charges. (All verification must be made via a third party verification tax returns, w-2, etc.).

However, few hard money lenders and many Portfolio, Non-QM lenders can alternately verify the ATR. The verification is done in alternate methods, which enable those lenders to arrange loans to owner-occupied borrowers.

Do hard money lenders arrange fully amortized loans for a long duration?

Most hard lenders arrange loans for 12 months to three years. A small percentage of hard money lenders who can verify the "ability to repay" is now arranging 15-year and 30-year fully amortized loans for borrowers with bad credit and other financial issues that disqualify them from Conventional or FHA loans.

Hard money Bridge Loans to owner-occupied borrowers

Bridge loans to owner-occupied are exempt from the ATR rules but have another set of rules, such as finding a new property and a loan duration of no longer than 12 months. Another definition of a bridge loan applies to owner-occupied business purpose loans or commercial non-owner-occupied owner-occupied properties.

Hard Money Business Purpose Loans to owner-occupied homeowners

Business purpose hard money loans to owner-occupied do not require the lender to abide by the ATR rule and open the door for fast funding without the liability to the lender of incorrectly assessing the ATR. The lender must verify that the money will be used for business only and not for any consumer purpose. Many of the Business purpose loans are in the second position behind a conventional mortgage; the maximum loan amount will be based on the percentage of combined loans divided by the property value. This percentage called Combined Loan To Value or CLTV. The formula for the CLTV is CLTV=(First Mortgage + Hard money Business loan) / Property Value.

Why private money lenders are afraid to lend on residential owner-occupied

Hard money loans can be arranged in a little as five days. From an investor's point of view, the equity in the property should be sufficient to cover the money they lend in the event of default. In a rising market, the homeowners have no trouble getting out of a loan by selling the property or refinancing it, but when the market goes down, the owner-occupied borrower who cannot keep making payments have only one choice remain – to sell the property. Although the borrowers agree to sell their properties to pay off the loan, they took many times they have a change of heart, and instead of selling, they contact lawyers with the hope to stay in the property without the need to pay the investors right away.

Default on owner-occupied Vs. default on non-owner-occupied properties

Because sympathetic court view of the homeowner facing a financial crisis, it could become a nightmare to foreclose on homeowners who are resistive to leave the houses. When the homeowners have children, it can also become an emotional, humanitarian problem for the private investors. On the one hand, the investors want their money back, and on the other hand, they don't want to kick the family out to the street. Combining the potential legal entanglements and the humanitarian conflict in the event of default stops 90% of private investors from lending to owner-occupied borrowers. This conflict does not appear on non-owner-occupied properties.

Why are most mortgage brokers reluctant to arrange hard money loans to owner-occupied borrowers?

While brokers are eager to arrange hard money loans for commercial and non-owner-occupied properties, most of them shy away from the owner-occupied hard money loan. The reason for not wanting to touch owner-occupied loans is the potential exposure to legal troubles if the borrower cannot make payments or pay back the loan when it's due.

In default, borrowers are sometimes unwilling to sell the property, file for bankruptcy protection, or fight for a forbearance agreement. The broker could be sued rightly or wrongly by both the owner-occupied borrower and the private investor. The potential lawsuits and aggravation stemming from arranging owner-occupied loans prevent most hard money brokers from even suggesting it to their private investors.

The three kinds of hard money loan for residential owner-occupied

There are three kinds of loans that hard money lenders/brokers arrange for owner-occupied who own residential properties:

1. Consumer purpose bridge loans – under 12 months interest only.

2. Business purpose loans – hard money loans for business purposes are typically 6-months to 5 years and are either interest only or partial amortized. Arranged by local hard money brokers and also by more prominent size lender who funds loans in many states. portfolio lenders. (Fix and Flip are mostly non-owner occupied, but when the contractor is owner-occupied, they will come under the category of business purpose loan)

3. Consumer purpose long-term hard money loans on residential properties –are being arranged by portfolio Non-QM lenders who can verify ATR in alternative ways or Non-Qm lenders exempt from the requirement to verify ATR.

The typical interest rate for these Non-QM is better than that of the hard-hard money or the soft-hard money lenders but not as good as the rate offers by Banks to borrowers who could verify their Income with tax returns. Non-Qm lenders are not categorized as Private Investors and not always consider as hard money lenders.

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