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 hard money loans or private money loans.
What are these? Let’s take a look.
Consumer Purpose/Owner Occupied Hard Money Loans Or Private Money Loans
A consumer purpose or owner occupied loan is a loan where the borrower intends on living in the property that they’re obtaining the loan for. Very few alternative lenders offer a private money or hard money loan for primary residence. Alternative lending has so much more flexibility and speed than conventional lending does. We offer tools to help you get to where you want to be. Whether you are a self-employed borrower with a seasoning of funds and reserves issue, or a real estate professional trying to provide their client with all the options available to them, private money is a great tool that gives the borrower lending luxuries such as the ability to make cash-like offers.
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 loans and long term private consumer loans.
Consumer Bridge Loans
These 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:
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 Loans
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. Learn how to get this type of loan here.
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 whose terms, although more attractive for the borrower, were not in compliance with California Dept. of Real Estate 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.