Understanding Owner-Occupied Hard Money Loans

What is an owner occupied hard money loan?

“Owner occupied” refers to a home you live in. An owner occupied hard money loan is one that you take out on your primary residence. Most hard money loans are for investment or business-related properties, but more lenders have recently opened options for primary residences.

With these loans, you can buy or refinance your home, or even get a 2nd, 3rd or 4th mortgage. Use the funds for personal expenses, home improvement, debt consolidation, legal settlements, or other purposes.

These loans even work for those who can’t be approved by traditional lenders due to lower credit or shorter employment history. They are issued by private investors, not banks, so they come with flexible guidelines.

Here’s how to qualify for this type of loan.

Who qualifies for an owner occupied hard money loan?

Qualifying for an owner occupied hard money loan is often easier than qualifying for conventional. You might qualify even with:

• Irregular income
• A loss shown on tax returns
• A recent credit event
• Lower credit score
• Less than 2 years of self-employment

Hard money lenders typically look at the entire scenario instead of disqualifying an individual for one component of the loan. 

For example, someone with high net worth and a large down payment may be approved despite a lower credit score.

It’s worth applying even if you have been rejected by traditional lenders. 

Consumer purpose hard money loans

Hard money loans can be used for business and personal reasons. Another name for personal use is “consumer purpose.” In the past, consumer purpose hard money was hard to find due to regulation changes. Now, more lenders are offering them. Following are examples.

• Purchase a primary residence
• Purchase a vacation property
• Getting a 2nd, 3rd, or 4th mortgage on a primary residence
• Take cash out for various purposes
• Settle a divorce or other legal issue
• Cure a foreclosure
• Dealing with probate issues
• Pay off a bankruptcy
• Complete home improvements
• Consolidate debt
• Get a bridge loan to purchase another property before selling your current one

Business purpose hard money loans

You can also use a hard money loan for business reasons, including

• Starting a business
• Expanding a business
• Create a liquidity cushion
• Purchase or rehab an investment property
• Develop a vacant lot
• Buy unimproved land

Even though you are using the funds for business purposes, you can still take the money out of your owner-occupied property.

Owner occupied hard money loan requirements

Hard money lenders are very flexible on credit score and employment history. Still, they want to be confident that you can afford the loan, so they will check your income history and net worth. You will supply income documents like W2s, 1099s, a P&L, tax returns, and bank statements.

The loan purpose also must make sense. Ideally, the loan is on a strong property with a lot of equity or potential. If it’s a short-term loan (see the next section), you should present your exit strategy, in other words, how you’re going to refinance out of the loan before it comes due.

Loans are reviewed on a case-by-case basis. Just because a scenario was denied at another lender or bank doesn’t mean it won’t qualify. Hard money lenders specialize in making unique deals work even if other lenders don’t want them.

Short-term and long-term hard money examples

Depending on the purpose, your loan term could be short or long. 

You might need a loan for 12 months due to buying a house before selling your current one. You can use a short-term hard money loan to acquire the new home then refinance out of it when you sell your current home.

But a newer and less common type of hard money loan is the long-term private money loan. These are amortized over 30 years so there’s no risk of losing a property because the loan comes due. These loans are great for buying a primary home when a traditional lender won’t qualify you.

Owner occupied hard money rates

You can expect to pay higher rates than conventional. Rates could be around 3% higher than conventional financing, plus come with upfront points. 

Though rates are higher, they are well worth the cost when you need cash or want to purchase a property.

Hard money alternative: Bank statement loans

Bank statement loans could be a good alternative to hard money. They review 12-24 months of bank statements to verify income instead of tax returns. If you have a lot of write-offs, a bank statement loan could help. You may get slightly better rates as well.

Additional alternatives include:

• 1 year self-employed bank statement loan
• Bank statement 2nd mortgage
• DSCR loans for investment properties (no-tax-return loan)
• More self-employed mortgage options

Example scenarios

Here are hypothetical scenarios of how someone could use an owner occupied hard money loan.

Someone is going through a divorce so they need to divide $500,000 of equity in a home. The options are to sell or refinance. One spouse wants to keep the home but can’t qualify for a conventional cash-out refinance. The spouse gets a hard money loan for $250,000 to pay off the other spouse and keep the home.

Another scenario involves a home purchase. A home buyer is a high-net-worth individual with a long law career. But she just started her own practice. She would like to buy a home to live in, but the home needs repairs, and isn’t eligible for a conventional loan. She gets an owner occupied hard money loan to purchase the home and fix it up. The hard money loan overcomes two obstacles: property deficiencies and new self-employment.

Pros and cons

While owner occupied hard money loans have great advantages over traditional financing, they are not right for everyone.

Pros

• Overcome traditional financing barriers
• Get a long-term loan for personal purposes
• Fast approval
• Make-sense underwriting

Cons

• Higher rates
• Upfront points
• Risk of losing the home with a short-term loan that you can’t refinance later

FAQ

Bottom line: Owner occupied hard money loans could be a good solution for you

For those dealing with “outside the box” situations, a hard money loan on a primary residence could be the answer.