The real estate industry is increasingly competitive. That’s particularly true in states like California, where the number of would-be buyers always outstrips available properties. When there just aren’t enough homes to go around, sellers are in charge, and buyers must seek any advantage they can get to secure their next home. An owner-occupied private money loan could be the key to beating other buyers.
How is an owner-occupied private money loan different from a conventional mortgage loan? The biggest differences are that they are far more flexible and that their speed of approval is significantly faster. Of course, there’s a lot more you’ll need to know.
Why Consider a Private Lender for your Home Loan?
In the quest to buy your dream home, many different advantages come into play. Your agility, your available down payment, your real estate agent, your creditworthiness – all of these can be strengths (or weaknesses). However, one thing that many aspiring homeowners overlook is the type of loan in question.
The conventional loan process is fine for many people, of course. If you have lots of time to search the market, you can find a home that’s going up for sale, and have little or no competition, and you’re the most qualified candidate for the loan possible, you should have few issues.
Of course, most of us don’t live in that perfect world. An owner-occupied private money loan can make the difference between getting that dream home and missing out because of something as minor as a credit glitch or another buyer swooping in with cash while you wait for the loan to process. So, it’s easy to see why buyers would demand an alternative. They can also be used in situations where you might not qualify for a conventional loan.
Unsure if an owner-occupied private money loan is right for you? Let’s take a closer look at what these loans are and how they differ from other options on the market.
What Is an Owner-Occupied Private Money Loan?
First, let’s establish what an owner-occupied private money loan is. They come by many names. In addition to private money, they are also called consumer bridge loans or hard money loans. For those private lenders who offer these loans, they’re available in two broad types – short-term “bridge loans” and longer-term private consumer loans.
Both types are considered “hard money” loans and are always secured by real estate (generally, the home in question). They also tend to be short-term, but that isn’t always the case. While you’ll find hard money loans used for flipping homes or for buying investment properties, they can also be useful for people looking to buy a home to use as their primary residence.
Are There More Risks and Requirements with a Hard Money Loan?
Hard money loans generally come with more risk – to the lender, not to the borrower. In a conventional lending situation, the decision to lend is based on an in-depth exploration of your credit history, your debt load, and your ability to repay the loan. A great deal of time and effort is put into determining whether you’re the right candidate for the loan, or if there is a risk that you will default and the lender will be left holding the bag.
With a private money loan, that’s not the case. Your creditworthiness does enter the picture, but it’s not as important. That’s because the lender often makes a decision based not on your credit score, but on the value of the property being purchased. The lender’s inherent risk increases, and that means there are a few additional requirements for would-be homebuyers.
Still, the process is much more streamlined than what you’ll find with a conventional loan. It’s also a good option for any buyer who might find they need a Plan B, rather than going with Plan A (which would be a conventional lender).
Why Consider an Owner-Occupied Private Money Loan?
Why should you consider going with an owner-occupied private money loan rather than a conventional loan? Many reasons could make this a good decision. Some of the most common reasons include the following:
- Need for Speed: You might have a need to close quickly. Sometimes a lender who initially approved you will not be able to close on time, or cancels the loan outright.
- Need to Compete with Cash Buyers: A strong purchase offer will generally contain few or no contingencies. Having no loan contingency might be the difference in winning the opportunity over cash buyers.
- Don’t want to Move Twice: Private lenders can cross two or more properties in a single loan. Banks won’t do that. This allows you to obtain a bridge loan of up to 100% of the target property purchase price, secured by both the new home and your existing home. Now you don’t have to sell first and move twice.
- Difficulty Documenting Income: If you are self-employed, many banks will not quickly qualify you for conventional financing. Issues like seasoning and reserves are buzzwords that can haunt self-employed borrowers who write off a lot of expenses on their taxes.
Other reasons that might steer a homebuyer to consider the private lender route include:
- Poor Credit: If you have poor or no credit, the chances are good that a conventional lender won’t give you a second glance. For too many aspiring homeowners, that means you’re out of the running for a mortgage. However, a hard money lender doesn’t focus on your credit. Instead, the loan is secured by the value of the property. So, for those with poor or no credit, an owner-occupied private money loan might be the only option available.
- You’ve Filed for Bankruptcy: Bankruptcy has a lingering negative effect. It stains your credit for many years, and most lenders will deny your application out of hand. Again, because hard money lenders focus on the value of the property and not the credit history of the borrower, an owner-occupied loan could be a viable choice.
- You’ve Had a Foreclosure: Like short sales, a foreclosure can make conventional lenders avoid you altogether. However, hard money lenders focus on the property, not your personal history, so a foreclosure does not necessarily mean you’re out of the running for a loan.
- Employment History: Most lenders demand two years of employment history at a minimum. If you’ve been on the job for less than two years, you’re usually out of luck, no matter what your credit history or financial situation might be like. This requirement also makes it challenging for entrepreneurs and startup owners to find a mortgage. Hard money lenders aren’t concerned with how long you’ve been with an employer, though.
Hard money loans are all about flexibility. If you can prove how you’ll repay the loan and the property securing the loan is acceptable, there are very few hurdles that can prevent you from getting the mortgage you need.
How Does an Owner-Occupied Private Money Loan Differ from Other Loan Options?
So far, we’ve touched on what an owner-occupied private loan is and how these work for borrowers who might not qualify for a conventional mortgage. However, they differ from other loans in a couple of other key ways that you’ll need to understand. These are the loan approval requirements and the speed of loan approval.
Private Money Loan Requirements: The Flexibility You Need
Conventional loans are incredibly rigid in their requirements. You must have at least two years of provable history with the same employer. You need tax returns, explanations for periods of unemployment or underemployment, documentation about unseasoned money in your bank account, and much, much more.
There are so many hoops to jump through that many aspiring homeowners simply cannot meet the requirements. Where does that leave them? Stuck in their current situation with little to no hope of a change anytime soon.
With an owner-occupied private money loan, the situation is different. The requirements are much more flexible. All you need to prove is that:
- The property has sufficient value to back the loan
- You will be able to repay the loan
Compare that to the onerous burden experienced when applying for a conventional mortgage. Hard money loans are simpler, more straightforward, and much easier to qualify for, which is good news for those who might not be approved for a conventional loan.
With that being said, you will need to comply with some pretty set-in-stone requirements, even with private lenders. These usually include the following:
- The property must meet the lender’s LTV (loan-to-value) ratio
- You can prove your income with W2s or tax returns (or other evidence, such as pay stubs)
- You can provide evidence of previous and/or current debts, such as auto loans or credit card debt
- You can comply with the lender’s debt-to-income ratio requirements for the duration of the loan
- You can provide the lender with a plan for loan repayment
Owner-Occupied Private Money Loan Process: Faster Than Conventional Mortgages
In a competitive real estate market, speed is of the essence. However, “fast” is one term that never applies to the conventional mortgage process. It’s time-consuming, convoluted, and about as slow as it could possibly be.
The snail’s pace at which conventional lending moves is one of the most common reasons for buyers to lose out on the home of their dreams. Picture this – you’re ready to move. You put your current home on the market and begin the search for that perfect property.
You spend weeks checking out property after property until it happens – you find the ideal place to call home. You start the loan approval process, which can take weeks, or even months to complete, only to find that someone has swooped in and bought the property out from under you. There’s no recourse here, either. Your only option is to keep looking, even though you know it will be next to impossible to find a property that fits your needs and plans as well as the one you just lost.
With an owner-occupied private money loan, that doesn’t have to be the situation. A private money loan might take only a week for approval. In some cases, loan approval can be fast-tracked and may require only a few days. This makes owner-occupied private money loans good options when time is of the essence. Once you’ve purchased the home, you can always refinance into a conventional loan.
The Considerations with Interest Rate
We’ve addressed two ways that owner-occupied private money loans differ from conventional mortgages, but there is another that you should understand. Because of their nature, owner-occupied private money loans usually come with higher interest rates than what you would find with a conventional mortgage. That’s directly related to the greater risk taken on by private lenders.
Because their decision to offer financing is contingent on the value of the property, rather than an in-depth investigation into your financial life and your creditworthiness, private lenders undertake more risk. To offset that risk, they charge higher interest rates on their mortgages.
Most borrowers pay off a private money loan quickly, even if the loan is a 15 or 30-year option. This can save you a great deal of money in terms of interest.
Private Money Loan Lifespan: Shorter Than Conventional Mortgages
Another difference you’ll discover is that these loans are often designed to be shorter than conventional loans. For instance, bridge loans are usually designed to last just a few months, bridging the gap between putting your existing home on the market and getting into the new home.
Even longer-term hard money loans typically last only about 12 months. However, other owner-occupied loan formats are available, and these can extend up to 30 years. With that being said, the high-interest rate charged makes it a good idea to refinance into a conventional mortgage when you can feasibly do so.
What to Expect in Charges for an Owner-Occupied Private Money Loan
So, how much might you pay in interest for an owner-occupied private money loan? It varies a great deal from private lender to private lender, as well as from mortgage to mortgage. However, you can expect to see an interest rate of between 8% to 18% depending on the lender in question. At Pacific Private Money Inc., we usually assess between 8.9% and 11.9%, although lower interest rates may be available for very low LTV loans.
However, interest is only one way that a hard money loan will cost you. You’ll also need to pay points upfront for processing fees (we may charge two to four points depending on loan size, LTV, and maturity), which increases your costs. There’s also the fact that many hard money lenders require a significant amount of money as a down payment – between 25% and 40% of the purchase price.
Between the higher interest rates, the significant amount down, and the cost of processing, most homeowners enter into an owner-occupied private money loan with the intent to refinance as soon as possible. However, that usually entails having a plan and being able to work on your creditworthiness.
For homebuyers interested in a hard money loan on a primary residence who don’t qualify for a conventional loan, the process to follow to refinance is pretty simple. All you need to do is boost your creditworthiness. However, that can entail any number of different steps, and often varies from consumer to consumer. Some of the steps you might need to follow include:
- Improving your debt-to-income ratio
- Paying off delinquent debt
- Limiting applications for new credit
- Strategically applying for new debt to increase your credit capacity
While some of these steps can be done quickly, others may require time. For instance, if you lack employment history, the only way to season that aspect of your credit profile is to remain with an employer for a longer period. Once you are eligible for a conventional loan, you can apply with a lender, pay off the owner-occupied loan, and benefit from lower interest rates.
Of course, owner-occupied private money loans are often used by those who need to move quickly to avoid missing out on a dream property. In this case, you will not need to rebuild your credit to refinance. You’ll simply need to have a plan in place. Some of the more common scenarios include the following:
- Selling your existing home to pay down the hard money loan (bridge loan) and refinance into a new mortgage
- Using an inheritance or other windfall to pay off the owner-occupied loan
- Making additional payments on the loan to pay it off sooner than the term
Finding a Lender for an Owner-Occupied Private Money Loan
While an owner-occupied private money loan can help you get that dream home if you don’t qualify for a conventional loan, or need to make an offer very quickly, you will find that not all hard money lenders offer these financial tools. For a private lender to provide an owner-occupied private loan, they must provide extra documentation and jump through other hoops, including being licensed as a mortgage loan originator and providing the owner with a mandatory rescission period. Many private lenders simply cannot comply with those requirements.
What that means is, as a borrower, you will need to do your legwork to find a lender that not only offers owner-occupied private loans but can also deliver other critical advantages, such as:
- Ability to extend consumer-facing loans
- Willingness to lend on the type of property in question
- Ability to service a loan of the amount you need
- Willingness to take first or second lien position
- Ability to offer a loan term that meets your needs
At Pacific Private Money, Inc., we have worked with homebuyers in your position hundreds of times. We can offer owner-occupied loans from six months to 30 years. We also offer closing timeframes of five to 21 days and can service loans as small as $150,000 to as large as $5,000,000. We invite you to learn more about our lending capabilities, and how an owner-occupied private money loan can help you achieve the dream of homeownership.