Biz Loans & Owner Occupied Homes

Residential mortgage brokers have been hearing about the dearth of qualified mortgage (QM) business, and the resulting proliferation of Non-QM loans. For many real estate investors and business-purpose borrowers, these terms may become confusing, especially when also considering hard money loans, which some call “private” money. Some quick definitions and examples may be helpful.

“Qualified Mortgage”

 This term, and the inherent underwriting standards, came into the forefront with the 2010/2014 adoption of Dodd-Frank by the Consumer Financial Protection Bureau. In addition to rules regarding balloon payments, interest-only loans and much more, these loans also limit the lender’s points and fees while mandating adherence to ability to repay (ATR) guidelines. 

“Non-QM” loan

These are full-documentation loans supplemented by either tax return or bank statement verifications. Lenders are more flexible with reviewing the entire borrower picture and not just their credit scores and “one-size-fits-all” UP or LP underwriting matrices. They are neither subprime nor “stated-income” loans. 

“Hard money” loan

These are shorter-term loans used primarily for a business purpose for borrowers who either cannot qualify for bank financing or require funding quicker than a bank can offer. Some borrowers and brokers may also refer to these as “bridge loans”, depending on the use. 

For most licensed California lenders, the four primary underwriting considerations are:

·        Loan purpose

·        Amount of equity

·        Ability to repay

·        The exit strategy

Some of the similarities between hard/private money and non-QM include:

·        Ideal for self-employed or non-traditional income

·        Flexible loan terms

·        ATR qualification

·        Refinance or new home purchase

·        Borrowers with past foreclosures, bankruptcy, late payments or credit trouble

 Key differences summarized:

·        Use of funds: Whereas non-QM loans can be for consumer or business-purpose use, hard money loans can only be for business purpose use. This means no “personal, family or household” use of funds.

·        Documentation: Hard money loans are typically underwritten with much less borrower documentation than Non-QM loans.

·        Repayment timing: Most hard money loans are written for 1-5 years, with typical term being 3 years, partially amortized with a balloon payment. These terms are difficult to find in Non-QM loans.

·        Construction: Much easier to qualify for ground-up construction financing with hard money financing

·        Trustee loans: In rare instance when a borrower can find a lender to make a loan to a trust, a trustee personal guarantee is almost always required. However, with hard money trustee loans, this personal guarantee can be negotiated.

 Each type of loan is defined partially by the borrower it serves and quite a bit by the underwriting guidelines it follows. Borrowers will benefit by the lowest fees and rates with QM and Non-QM loans, while hard money is often the quickest funding option with the least documentation. What the decision often boils down to is the borrower’s desire to undergo a lending institution’s timing and scrutiny versus the opportunity cost if hard money financing had otherwise been considered.