Hard money dilemma — move in?

[Bob Duke]

So here’s the situation. 

Just sold primary residence here in Texas. Currently own investment property just down the street that I am rehabbing to rent out...that house was purchased with a hard money NOO loan. Still have six months before I need to refi out of it. Problem is credit isnt quite ready for that yet.

I signed something when I bought the house with stated HML basically agreeing to not live in the house. If I move in for 3-6 months to save money while I finish rehab, is there any recourse from the lender?

Don’t want to do anything that would cause them to foreclose or demand entire loan amount due immediately. 

Thanks in advance!

Bob

[Jeff S.]

The difference between a business purpose and consumer purpose loan and where owner occupancy fits in, are easily the most misunderstood aspects of private lending on this board.

Are you able to answer this question: Can a private/hard money lender make “A loan to improve a principal residence by putting in a business office.” **

From Dodd-Frank, loans made for personal, family, or household use are considered consumer purpose loans and subject to TILA, RESPA, NMLS, etc., and all the associated disclosures.  Most, but not all hard/private money lenders, do not have an NMLS registration and also don’t want to deal with the disclosures and associated consumer laws.  This is generally the realm of conventional lenders.

Loans not made for personal, family, or household use are considered business purpose loans and exempt from Dodd-Frank, TILA, RESPA, NMLS, and all the associated disclosures.  This is generally the realm of hard/private money lenders

Notice, it’s the use of the money that’s important, not owner occupancy.

Any knowledgeable hard/private money lender will ask you to sign a document upon application, stating the use of the money that you want to borrow. Sound like yours, @Bob Duke, just didn’t want you to move in – which is naive. If your use was for a personal, family, or household use then this would be a consumer purpose loan and it's unlikely you would have found a hard money lender willing to loan on the property.  (Though they exist.)

If your use of the money was for a business purpose, such as to buy an investment property like a flip, or to buy business inventory, another rental, or to purchase a business, then this would be a business purpose loan and most hard money lenders could make the loan.

Some states, such as Nevada, supersede all of this and require all loans be treated as a consumer purpose loan.  It’s important for lenders to understand state law.

A lot of people here think that it matters whether you live in the property securing your loan. With very little exception (multi-family), it’s irrelevant. For example, if you borrowed money against your rental, which a clearly a business, and intended to use the money for family medical expenses, that would be a consumer purpose loan since the use of the money was for a personal, family, or household use. Same if you borrowed money secured by a gas station and intended to use the money to send your daughter to college. TILA, RESPA, NMLS, all disclosures, etc. would apply. Notice that owner occupancy is irrelevant in these contexts. What matters is how you intended to use the money.

Moving in, doesn’t change your original intent and this is all any lender has to protect him or herself. If you complained (why would you?) or there was an audit, your lender would pull out your written claim that he or she made the loan relying on your up-front assertion that you were buying a rental, which is clearly business purpose.

We’ve had borrowers sign our Use of Loan Proceeds Statement and then decide they like the house enough to move in.  No problem – especially since in their case they were experienced flippers (not required though).  We’re protected because we have their written assertion that honestly, it was their initial intent.  Assuming no fraud Bob, it sounds like your initial intent was to rent the house out as a buy and hold – a clear business purpose.

Moving in, doesn’t change your original intent (does it?). Your note and mortgage probably don’t prevent your moving in and I don’t know if your other document would hold up in a foreclosure. You can speak to a lending attorney or have your lender speak to theirs, but I see no issue with you moving in so long as you were honest up-front. (Owning other rentals would support this claim, but not required).

** The quotes were there for a reason.  This exact example is written into Dodd Frank as an exempt transaction.  Any hard/private money lender could make this loan.