Hard Money Lending for Investments vs. Owner-Occupied Purchases: What You Need to Know

Oftentimes, people looking to purchase residential properties for sale in California look to hard money loans to help them get the financing they need when a traditional loan falls through. While new rules and regulations were originally meant to discourage subprime lending and irresponsible lenders, they can also affect potential borrowers. One of the biggest attractions many borrowers mistakenly believe about hard money lending is that they are not subject to the same regulations as loans from the bank. People believe that they can avoid having to show proof of their income. The truth is, income documentation still needs to be completed, it’s just that what counts as “income” can vary with hard money loans.

Understanding Income Documentation on Hard Money Loans

Consumer lending on residential property (ranging from 1-4 units), requires income documentation. Your hard money lender needs to be able to document your income and insure that your debt-to-income ratio is in line. In the past, hard money lending used to be handled differently for consumer loans. Instead of looking at debt-to-income ratios, lenders would look at the lendable equity on the property. And although this is still done as part of the hard money underwriting process, income and debt-to-income ratios still need to be documented and calculated. However, one of the main things that set hard money loan underwriting apart from traditional bank financing is how that income is documented. Hard money lenders look at many of the same documents to prove income, such as pay stubs, W-2’s and tax returns, but third party documentation or bank statements are also acceptable.

Fees Passed onto the Borrower

With bank loans, caps on fees and rates may not make that much of a difference. However, with hard money loan, these fees are passed onto the borrower. With hard money loans, the investor is generally looking for a better return on their money than what they can get elsewhere, which is why interest rates and fees are higher. This can be very difficult for small balance loans, but these issues don’t always apply – particularly in the case of those looking for hard money loans for non-consumer purposes. For purchases of investment properties or commercial properties, underwriters still look primarily at the equity in the property. As you can see, not all rules and regulations apply equally to every particular situation. If you’re interested in exploring your options with hard money loans, please reach out to us, and one of our expert hard money loan specialists will work with you to help answer your questions. Please do not hesitate to call us, or email us using contact form.

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