One of the most frequent questions we are asked is if we will do hard money loans for owner occupied homes.
We only loan on owner occupied homes if the funds are specifically intended for business purposes.
This means that the loan funds are used for a business need and not for a personal, family or household use.
Examples include a loan to expand your business or a loan to put a business office in your residence.
If you have checked around, you have undoubtedly found that most hard money lenders will not do owner occupied loans. Why is that? Mostly, it is because the lending requirements set forth by the Truth In Lending Act, Regulation Z, Real Estate Settlement Procedures Act and Regulation X are stricter on owner occupied loans than non-owner occupied loans.
There are some who think that it is illegal to do a hard money loan on owner occupied properties. At the other end of the spectrum, there are others who think anything goes because it is hard money. Clearly, neither of these are correct.
In reality, there are a lot of misconceptions about lending laws that cause people to have incorrect ideas of what can and can’t be done.
The truth is that it is legal to do these loans but there are many limitations on what can be done and how much can be charged in fees.
Among the requirements that pertain specifically to owner occupied loans are the following:
1) Income must be verified through a third party source to show a borrowers Ability To Repay
2) If the loan qualifies as a “high-cost loan”, property taxes and hazard insurance must be collected (impounded) for at least the first year of the loan. (Only the borrower can cancel the impound account, not the lender.)
3) Assuming that the loan qualifies as a high-cost loan, if the lender offers a loan that has a prepayment penalty, the borrower must also be offered an option that does not contain a prepayment penalty.
Disclosure requirements must also be met so that the borrower knows exactly what loan terms he is getting before signing loan documents. These requirements are the same as loans that are done by the banks.
There are many other requirements that lenders must follow but this should give an idea of some of what goes on with owner occupied loans.