I get a lot of questions about hard money purchase loans for residential properties in California. With many people not able to secure bank financing for one reason or another, hard money loans have become an alternative for even those who have may have been able to obtain bank financing in the past. There is a big difference, however, between hard money lending for consumer purposes and for investment purposes.
It is no secret that there has been an inundation of mortgage regulations over the past few years. We are not done with the new regulations either, they are still being written and phased in. While these regulations were meant to curb subprime lending and irresponsible lending practices by institutions, they do also apply to hard money loans. Many potential borrowers who call looking for financing on their purchase are unaware of these changes and believe that hard money lending is not subject to the same regulations as bank money. One of the top issues people have with the banks that they believe hard money can avoid is the documentation of income.
For consumer lending on residential property of 1-4 units income documentation is mandatory. We must be able to fully document income for the borrower and ensure that their debt to income ratios are in line. This is different than hard money lending used to be for these types of loans. In the past, the main requirement was lend-able equity in the property. That is still a main part of hard money underwriting, but income must also be documented and debt to income ratios calculated.
While income must be documented, we do have flexibility with regards to how it needs to be documented. Of course pay stubs, W-2's, tax returns, etc. are all acceptable, but we can also document this income with bank statements or other third party documentation that shows a borrowers income.
Another issue that we have with these types of consumer loans is the cap on fees and rates. For bank money these caps may not cause much of an impact, but with hard money all the fees are passed through to the borrower. In addition, the funding source is typically an end investor looking for a return on his/her money greater than they can get elsewhere. Due to these and other aspects of hard money, making these type of consumer loans for small balance loans is difficult at best.
For those looking for hard money for non consumer purposes, some of these issues do not apply. In this scenario it is the equity in the property that is the underwriting criteria. In either scenario we do have programs that can help. You can visit our website for more information about California hard money loans and to contact us should you have a scenario to discuss. Typically speaking we can give you a good idea of whether we can help or not with a brief conversation about the transaction.