Both Consumer and Business Purpose Loans are Available
Owner occupied hard money loans to purchase or refinance is a niche loan program not offered by all lenders. The benefit is that you now have access to money even though you can’t qualify through a bank or institutional lender. Owner occupied is when the borrower resides in the subject property. Even if a hard money lender offers owner occupied loans, most of the time they only offer business purpose loans. The difference between a business purpose and consumer purpose owner occupied hard money loan is what the borrower does with the loan proceeds.
If the borrower is using the funds for anything business related, such as operating capital or purchasing new equipment, it is classified as a business purpose loan. If the borrower uses the loan proceeds for anything consumer related, such as purchasing a primary residence or consolidating personal debt, it is classified as a consumer loan.
The reason why most lenders do not offer owner occupied consumer hard money loans is because of Dodd-Frank. Enacted in 2010 due to the 2008 financial crisis, Dodd-Frank requires lenders to document the borrower’s ability to repay the loan. While most hard money lenders have left the consumer lending space due to the new regulations, Marquee Funding Group has recognized this as an opportunity to help underserved borrowers seeking a new first, second, third, or fourth mortgage.
Close Quickly – Much Faster Than Your Bank
Owner occupied hard money loans for consumer and business purpose typically have quicker closing times than conventional loans. Marquee Funding Group’s average turnaround time on a business purpose loan is about 7 days and about 10 days for a consumer loan. The reason why consumer loans usually take a little longer to close than business purpose loans is that consumer loans must abide by TRID (TILA-RESPA Integrated Disclosures).
If a hard money lender tells you that they can do a consumer purpose hard money loan in less than 10 days, they are doing so illegally. Also, if a hard money lender is underwriting a consumer purpose loan and classify it as business purpose to avoid income documentation, this can also result in legal trouble. The telltale sign is if there is a prepayment penalty, it is not a consumer loan.
Flexible Credit Score & Debt-to-income Requirements
When applying for a conventional loan, traditional banks heavily weigh the borrower’s credit score into their lending decision. One of the primary differences between conventional lending and Marquee Funding Group is that we do not heavily weigh the borrower’s credit score. Rather, hard money lenders evaluate the total amount of equity in the property to make a lending decision. The way a lender determines the equity in the property is referred to as LTV (loan-to-value).
To calculate LTV, you must divide the loan amount by the appraised property value. For example, if you are seeking a first mortgage (called a senior mortgage) of $500,000 on a property worth $1,000,000, the LTV equals 50%. If you are seeking a second, third, or fourth mortgage (called a junior mortgage), you must calculate the CLTV (combined-loan-to-value). To calculate CLTV, you must divide the current loan(s) plus the new loan by the appraised property value. For example, if you are seeking a $200,000 second mortgage and you currently have a $100,000 first mortgage on a property worth $1,000,000, the CLTV equals 30%. Marquee Funding Group offers hard money loans up to 70% (C)LTV (transaction specific).
Lenders are required to document the borrower’s ability to repay through a formula called DTI ratio (debt-to-income). There are two forms of DTI: front-end and back-end. Front-end DTI equals PITI (principal, interest, taxes, and insurance) divided by gross monthly income. Back-end DTI equals PITI plus all expenses shown on credit report divided by gross monthly income. Lenders primarily evaluate the borrower’s back-end DTI. Conventional lenders typically go up to about 45-50% DTI, whereas hard money lender Marquee Funding Group can go up to about 60% DTI. For example, a DTI of 60% exists for a borrower with PITI of $5,000/month, other obligations of $1,000/month, and $10,000/month gross income.