Hard money loan but I don't own my primary residence... Issue?

Question

Greetings BP community,

I am a newbie investor/ REALTOR in the Atlanta, GA area and I have my first rental property deal under contract- close date set for Sept. 17th. The home would be financed through a local hard money lender here in the area. The purchase price for the home is $100k at 75% LTV. My total estimated cash-to-close amount is roughly 30k. I have already completed the initial home inspection, repairs are being completed as we speak, so outside of the re-inspection, I am just waiting to sit at the closing table. I received a call from my lender with unsettling news an hour ago.

Apparently, since I currently live in an apartment and do not own my primary residence, the underwriter will not be able to ratify the purchase because on paper, it seems as if I am attempting to purchase the rental property as my primary residence- even though I showed documentation of my current lease agreement and two months worth of utility bills. I did not follow through with traditional financing because 75% of income is derived from a monthly military benefit and my business partner is a travel nurse/ contract worker so her W-2's don't reflect her true income. Bank statement loan?

Can anybody lend any creative wisdom or insight? Again, I am in the Atlanta, GA area and I am also open to transferring to a different lender. My only backup strategy thus far is to present the owner with the owner finance option but the owner is a flipper so I know he possibly needs the capital from this flip to invest into the next one, so I just wanted to present the strongest offer/ solution possible. Thank you to everybody who took a second to read this.

Sincerely,

Gary Herndon

Wayne Brooks · Answer

@Gary Ryan Herndon Your HML is not Allowed to lend on an owner occupied property…this is what he's trying to prevent from happening. Most HML's require you buy/finance in an LLC to avoid this. Perhaps you can do it this way.
And why are “repairs underway” when you haven’t closed yet?

Willie James · Answer

I would suggest finding a new lender. Not all lenders assume you are attempting to commit mortgage fraud. Plenty of lenders would take your deal. I would post specifically in the Atlanta forum for a local recommendation.

Gary Ryan Herndon · Answer

@Willie A. James III @Wayne Brooks @Patrick Johnson @Jeff S. @Stephanie P.  @Ian Walsh @Matthew Crivelli @Chris Gossett

Hey community,

Thanks for  swooping in to rescue me. I was actually able to find a solid lender and qualify for a conventional loan at lower rate. I'll definitely archive all of the great information. Again, thank you for all the great information.

Sincerely,

Gary Herndon

Jeff S. · Answer

So, @Gary Ryan Herndon, it sounds like this lender will only make hard money loans to homeowners?  If not, they presume you’re moving in?  That’s just weird.

Most HML’s, and every lending attorney I know, will require you to sign a “Statement of Purpose for the Loan.”  Here you declare the use of the money you are borrowing (flip, rental, business inventory, etc).  Dodd-Frank specifically lists this statement as one of the five factors a lender should use when deciding whether the loan is for a business or consumer purpose.  If you lie and move into the home, the lender will use this as a defense.

I’d be more concerned that you are buying a long-term investment property with hard money when it doesn’t appear you have a viable exit strategy.  You claim you can’t qualify for a conventional loan now.  How will you refinance your way out of this property in the future?  I’m assuming your hard money loan is not cheap and typically for 6 months to a year in length.  If so, how will you repay this loan when it matures?  After asking why you need the money, this is the next question both you and your lender should be asking.

Chris Gossett · Answer

@Gary Ryan Herndon Unsure if the HML is the issue here or if you will run into the same issue with another lender. I’m not familiar with Georgia state laws, so someone more familiar with them should be able to help clarify, but here in Texas, the state constitution has Homestead protections. I had a similar issue come up. I sold a duplex - in which I lived in one side (signed a lease with new owner) and did not have any additional property to my name. I purchased a commercial property and held it for a couple of years and recently completed a Refinance; however, the trouble I ran into with every lender was the ‘Homestead’ rule within constitution - NOT your property tax ‘Homestead’ exemption via County Tax office. According to constitution, because the property was the only property in my name (not in LLC), I could potentially claim property as Homestead to shield myself from Bankruptcy in future. Lenders didn’t like that, so no one would lend. We found a way to make it work, but either way, I was unaware of this particular issue. As mentioned, unsure what Georgia is like, but curious to know if Georgia has something similar in place where bankruptcy proceedings would impact the lender’s ability to stake claim.

Ian Walsh · Answer

That sounds like bank funding.  You might want to look for another local lender that doesn't use banks funds.

Matthew Crivelli · Answer

Find a new HML. If you're legitimately trying to buy an investment property their shouldn't be an issue with you living in an apartment. My uncle is lawyer and he has always lived in apartments because as a single guy who likes to travel it makes more sense for him.

Stephanie P. · Answer

@Gary Ryan Herndon

This isn't a weird requirement at all.  MOST long term hold lenders have a requirement that the borrower not be a first time homebuyer.  The main reasons are:

• Occupancy fraud.  Most people buy their primary residence before they start investing.  Buying without tax returns or paystubs is way easier than going through the sausage grinder of conventional lending and people that don't qualify, sometimes, consider going this route.  
• Because there is no income verification requirement for many of these loans, there is no real ability to repay other than rent.  If you're living in the property, rent is decreased or non-existent, affecting the property's ability to generate income.
• RESPA rules are real and have a purpose.  In many respects, they are there to protect the consumer and keep them from being homeless in the event of default.  Skirting the RESPA rules is a felony and if a lender is found to be committing occupancy fraud, they could lose their business and the borrower could be fined or imprisoned or both

Not saying you're committing fraud.  Just saying those are the reasons you may be having a hard time finding a lender that will believe you. They're out there.  Find a good mortgage broker that knows where to send your loan.

All the best

Stephanie

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Patrick Johnson · Answer

@Gary Ryan Herndon I would agree with some of the above answers, in that you should find a new lender. I have a good one to refer if you find yourself in need of one.

Hard money loan but I don't own my primary residence... Issue?

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