What is a compliant private consumer/owner-occupied loan?

In addition to private loans most of us think of when we hear the terms “private money” or “hard money” (fix and flip/rehab/construction), Pacific Private Money also does consumer purpose/owner occupied loans.

What are these?

Consumer purpose and owner-occupied loans are loans in which the borrower intends to occupy/live in the property for which they are obtaining the loan, as their primary residence or the loan is for a consumer purpose (bill consolidation, helping a family member, paying a tax lien) and is tied to any form of real estate. Because of the tighter lending regulations (think TRID) the documents and disclosures involved as well as closing time frames and borrower protections can be overly onerous for most private lenders to manage the process. Lack of expertise, resource constraints and perceived risk can simply be too much of a hurdle for most private lenders to want to overcome.

However, properly underwritten and compliant, private consumer loans can be a great Plan B, not only for borrowers who can’t qualify for Plan A, a conventional loan, but also for mortgage professionals and real estate agents whose clients may not otherwise be able to find a conventional loan resulting in losing the purchase of a home.

What are properly underwritten and compliant private consumer loans? Let’s first look at what types of private consumer loans are available.  There are two:

Consumer bridge loan:

Consumer bridge loans are short term loans, typically for borrowers who, because of near term challenges, cannot get conventional financing. Here are some of the more common reasons where conventional financing is not an option for certain borrowers:

  • Buyer/borrower is looking to purchase a home AND also has a home to sell.
  • Borrower is downsizing and does not want to “double move”.
  • Short term seasoning issues such as a BK, foreclosure, short sale or job time
  • Down payment challenges
  • Divorce or probate situations
  • Bridge loan instead of liquidating other assets (stock, 401K, etc…) to avoid tax
  • 1031 exchanges
  • Reverse mortgage fallout

In these situations, most conventional lenders cannot or will not make a loan. Note- if, when evaluating the borrower’s loan package, we feel the borrower could qualify for a lower cost conventional loan, we will inform the borrower that they should pursue that route first.

Bridge loan terms:

  • Close in as little as 5-7 days, but generally expect longer, especially when TRID guidelines must be followed
  • Must have a purchase component to the transaction to be a true bridge loan
  • 11 month maximum term
  • No prepayment penalty
  • 9.9% typical interest rate
  • 2.0 – 3.0 points plus $1,495-$1,995 doc & admin fee

Long term private consumer loan:

Though less common, there are situations where a borrower needs a longer term private loan. Often it’s because of borrower credit issues that won’t be resolved in less than 12 months. The term “credit seasoning” is often used to describe the time it takes for a borrower’s credit to reach a level where a conventional loan is possible. Another example is “employment seasoning” where the borrower hasn’t been employed in their current role for at least 24 months, which is often the minimum length of time a conventional lender requires to show the borrower’s employment stability.

In both instances, the borrower may qualify for a long term private consumer loan. The only available private long term consumer loan is a 30/30 loan. This is a 30 year loan with fixed payments based on 30 year amortization.

Previously, private lenders could make a 30/5 loan (30 year loan due in 5 years) but because of recent regulatory changes these loans must be fully amortized. Borrowers, however, can pay this loan off sooner without penalty. Most are paid off/refinanced within 24 – 30 months.

A few other reasons for the 30/30 loan:

  • Self-employed
  • Trouble documenting income
  • Inconsistent income history
  • Credit issues due to a recent loan modification, short sale or foreclosure
  • Bankruptcy
  • Client already owns the home and needs to refinance, the purpose is consumer in nature, and there’s no purchase component

Loan Terms:

  • Close in as little as 5-7 days, but generally expect longer, especially when TRID guidelines must be followed
  • 30 year fixed
  • No prepayment penalty
  • 8.99-9.9-% typical interest rate
  • 2.0 – 3.0 points plus $1,495-$1,995 doc & admin fee
  • Debt ratios can be above FNMA back end requirements

Private lenders can also offer 20/20 loans or even 15/15 but these are uncommon as the borrower will usually struggle to meet the higher back end debt ratios.

A word of caution: Be careful when a private lender tells you they can do a consumer/owner-occupied loan that doesn’t fit the above framework.

We recently lost a loan for a borrower to another private lender who’s terms, although more attractive for the borrower, were not in compliance with BRE regulations. For the borrower, this was a good deal, one that we were not willing to match. Was it illegal? No. Was it unethical? Not necessarily. Was it compliant? Not at all.