Owner occupied hard money is one of the most misunderstood subjects in the mortgage industry. Most people, including mortgage brokers, hard money lenders and even attorneys, don’t understand how it works.
Many of them will tell you it can’t be done. Others think that because it’s hard money, the rules don’t apply. Neither of these are true.
The fact is that there are ways to do it correctly and there are rules about how to do them. In other words, there are limitations on what can and can’t be done. The purpose of this post is to clear up some of the confusion in this area.
The most common type of owner occupied hard money loan is the business purpose loan. As you might guess, the purpose of the loan must be to use the money for business purposes but there is a bit more to it than just that.
To qualify as a business purpose loan, the money needs to be used for a business that the borrower has an ownership interest in. This could be a new business being purchased or started, an existing business or a business that used to exist but doesn’t anymore.
An example that you might not think of is to pay off debts that were incurred for the business, like when a business owner uses credit cards to expand their business or to get through rough times.
Fortunately, to qualify as a business purpose loan, not all of the money has to be used for business purposes. The rule is that the primary purpose of the loan has to be for business use, meaning that more than 50% of the loan proceeds has to be used for business.
So if you want to put $100,000 into your business and you also want some money to pay down your credit cards that were used for personal expenses, as long as the amount being put into the business is more than the amount being used for personal expenses, the loan would still be considered a business purpose loan.
A major benefit of the business purpose loan is that the guidelines are pretty simple and easy to understand. There are no specific appraisal requirements other than the lender needing to make sure that the value is sufficient to protect them in the event of default.
Proof of income is generally not required. Proof of assets other than the property being used as collateral is also not normally required. What is required is a clear statement of how the money will be used. It must be written and signed by the borrower.
If you have any questions about how these loans work or if you could qualify, please call or fill out the contact form on our website.
In the next post, I will cover the next type of owner occupied hard money loan, the bridge loan or temporary loan.