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. ACTION FUNDING INC offers hard money loans for business purposes only, and does not originate any owner occupied loans for primary residence or homestead properties.
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. The Dodd–Frank Wall Street Reform and Consumer Protection Act, commonly referred to as Dodd–Frank, is a United States federal law that was enacted on July 21, 2010 to institute these safeguards. 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.
Here are some examples of consumer loans:
Purchasing a primary residence
Consolidating a loan to pay off credit cards
Remodeling a primary residence with a home improvement loan
Getting a first-time homebuyer loan
The hard money loan mortgage market has greatly expanded since the 2009 mortgage crisis with the passing of the Dodd-Frank Act. The reason for this expansion is primarily due to the strict regulation put on banks and lenders in the mortgage qualification process. The Dodd-Frank and Truth in Lending Act set forth Federal guidelines requiring mortgage originators, lenders, and mortgage brokers to evaluate the borrower's ability to repay the loan on primary residences or face huge fines for noncompliance. Therefore, hard money lenders only lend on business purpose or commercial loans in order to avoid the risk of the loan falling within Dodd–Frank, TILA, and HOEPA guidelines.
Because the primary basis for making a hard money loan is the liquidation value of the collateral backing the note, hard money lenders will always want to determine the LTV (loan to value) prior to making any extension of financing. A hard money lender determines the value of the property through a BPO (broker price opinion) or an independent appraisal done by a licensed appraiser in the state in which the property is located.
The interest rates on hard money loans are typically higher than the rates charged for traditional business loans. Rates could be as low as 6% and as high as 14% or more. Despite this, such loan options are popular among real estate investors for their fast approvals, higher flexibility, less extensive documentation procedures, and because they are sometimes the only option for securing funds.