If you’re online searching for a hard money loan to solve your particular financial problem, it’s important to know if your financing scenario is for a business purpose or a consumer purpose. If you’re a borrower, you may have never even thought about this question, but it’s something that most all hard money lenders and mortgage brokers consider when talking to prospective borrowers. It determines if the loan is even possible, and if so, which lender can fund it. This post will help you understand the difference between business purpose and consumer purpose loans so you can search online more effectively to find the right financing. I’ll cover the following topics:
Let’s get started…
Business purpose loans are for bonafide business purposes only. Examples include acquiring an investment property or cash-out refinancing a primary residence to fund a business. Most hard money lenders provide business purpose loans, not consumer purpose loans.
Consumer purpose loans are for personal use, like acquiring a primary residence or paying off personal credit cards. Hard money lenders that offer consumer purpose loans must comply with several additional regulations such as Ability-To-Repay (ATR) and TRID, which were created to educate and protect consumers during the home loan process. These laws are predominantly aimed at government-backed loans (Fannie Mae, Freddie Mac, FHA, VA, USDA), lenders like NonQM, and the few hard money lenders offering consumer purpose loans.
*I used the example of “personal judgments” twice because someone recently asked about a cash-out second mortgage on their rental property for $150,000, with $75,000 going into renovations on the rental home and $75,000 to pay off their former spouse’s judgments, who was still co-owner of the rental property. Since funds were for both consumer and business purpose, I called this a consumer purpose loan and referred them to another hard money mortgage company that might offer them a consumer purpose hard money second mortgage.
I say 90% but it might be closer to 95% of hard money lenders only originate business purpose loans. Short-term hard money loans are really meant for investment properties and business purposes. Hard money lenders want to be able to fund investors quickly, in as little as 24 hours. That isn’t possible for consumer loans that must comply with TRID guidelines that have seven-day, plus three-day waiting periods prior to consummation of the loan.
For the 5-10% of hard money lenders that do offer consumer loans, know that the lending criteria is very restrictive.
A first-time homebuyer will not get 100% financing from a hard money lender — more like 65% Loan-To-Value (LTV) on a primary residence. The borrower must meet the Ability-To-Repay rule on a loan that carries an interest rate in the 9%-10% range rather than a conventional loan that’s usually half as much.
Consumer purpose hard money second mortgages are limited to 65% Combined Loan-To-Value (CLTV). Lenders will have minimum loan amounts starting at $150,000 and up. It's nearly impossible to find a hard money consumer purpose second mortgage for less than $50,000 due to the regulatory restrictions. Plus, for the lender, it's the same amount of work for minimal return on investment. Small loans take the same amount of time (usually more) than larger loans, so lenders choose not to operate in that space.
Conclusion
It’s best to think of hard money as a private loan for business or investment purposes. If you need a hard money consumer purpose loan, beware that finding the right lender online may prove difficult because 90-95% of hard money lenders only offer business purpose loans.
As a mortgage broker, I work with lenders who offer hard money loans for both business and consumer purposes. While we do some consumer purpose loans, we mostly refer borrowers to other lenders or point them in the direction of credit unions, community banks, or some other institution since hard money financing options are so limited.