Owner-Occupied Private Money Loans: What You Need to Know Before You Apply for a Hard Money Loan

Sometimes, we have home buyers looking to acquire new property, but who are unable to get approved for conventional financing through a bank. And, while hard money loans are often looked at as a “last resort” because of the more favorable terms from banks, it may still be possible to get the financing you need with an owner-occupied private money loan.

Here’s how they work and what you need to know:

It May Be More Difficult to Obtain an Owner Occupied Private Money Loan

Most private and hard money loans were equity-based until 2008, which much of the lending and real estate industries were flipped on their respective heads. Back then, if the Loan-to-Value (LTV) ratio was 60% or less, a lender would issue the loan without being concerned as to whether or not the borrower could repay it.

Looking back, this was a very risky venture.

Now, hard money lenders need to document the borrower’s ATR –their Ability to Repay, among other regulations and requirements. This means owner-occupied private money borrowers can find that they go through exactly the same scrutiny as if they had applied for a conventional loan (and got turned down for it).

The good news is that our Los Angeles hard money loans don’t place as much emphasis on other things that banks count as absolutely crucial – things like credit scores and credit history.

There’s a 70% LTV Limit on Owner Occupied Private Money Loans 

If you have a 30% down payment, you can generally obtain an owner occupied private money loan. If you live on or are looking to buy a property in a rural or less desirable area, it’s possible that your lender will reduce the LTV ratio to 50-60%.

You’ll Need a Definitive Exit Strategy if You’re Using Private Money Financing

Most borrowers we work with have had a foreclosure or short sale around 2-3 years ago. With conventional loans, three years need to pass from the anniversary date of that short sale or foreclosure before the borrower can obtain a new conventional loan. If you’re around 2.5 years removed from your previous short sale and have a clear and definitive exit strategy to get out from under your hard money loan within six months or less, your chances of getting an owner occupied private money loan is much better than if you don’t have an exit strategy in mind.

You Don’t Need to Source or Season Your Down Payment Funds

When it comes to getting traditional financing from banks or other financial institutions, there are strict rules in place that track and monitor where the down payment funds are coming from, how long those funds have been in the account(s) and so on.

On the other hand, private money lenders generally don’t require a source or seasoned funds. They’re more concerned about your ability to repay and the equity involved. Many private money loans are made from business accounts or a non-family member who is providing down payment assistance. With hard money lenders, these funds can be used to make that property purchase.

Different Lenders Have Different Programs with Different Terms

Depending on the lender, you may find that you have different terms for your private money loan. Owner-occupied private money loans tend to come in terms ranging from a few months to up to 20 years.

Of course, you’ll want to gradually transition from a hard money loan to a more conventional loan, owing to the much greater affordability of traditional financing.

Things You’ll Need to Apply for a Hard Money Loan

Among other things, like the loan application and disclosures, you’ll want to have the following with you when you apply:

  • A copy of your credit report
  • Credit authorization
  • Preliminary Title Report
  • Escrow contact information
  • 30-40% down payment (remember, your funds don’t need to be sourced or seasoned)
  • Proof of income documentation such as your W-2, pay stubs, etc.

Your lender may have other requirements or need other documentation in order to move forward.

To learn more about private money lending or getting a hard money loan, contact our lending specialists at (818) 584-2424.

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