One of the most frequent questions we are asked is if we will do hard money loans for owner occupied homes.
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 are stricter than non-owner occupied loans but there are also many lenders who are afraid that if they make a mistake, they won’t get their money back.
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 limitations on what can be done and how much can be charged in fees. The limitation on fees can also cause lenders not to want to do these loans. If they customarily charge 5 points, they will certainly have to reduce that on anything that is owner occupied and some people aren’t willing to do this.
Among the requirements that pertain specifically to owner occupied loans are the following:
1) Income must be verified through a third party source.
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 offerred 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 in this type of loan.