Owner Occupied Principal Residence Lending
Let me start off by saying that we will always do loans to homeowners that are owner occupants. It is an important segment of lending and a heck of a niche for our office. It also has the most regulation by the State and Feds who, in their infinite wisdom, have decided that this category of homeowner needs protection. Lots and lots of protection.
These are generally very good loans. Most are just shy of getting 30-year fixed rate loans at or under 5% from what we call “A” paper lenders like Wells Fargo, Chase, B of A, Credit Unions, etc. Most are turned down due to something in their credit. Second most are turned down due to income – writing off everything as self-employed, or haven’t filed 2 years of taxes, doesn’t have 2 years of consecutive employment at the same job, etc.. Problem property is the third reason. All the turned down loans that we write have down payments of between 20% and 60%.
Many mortgage brokers have decided to not do this type of loan, stating the amount of additional regulations one has to be aware of and comply with when it comes to owner occupied loans. The tragedy is, they have run a lot of investors away from this type of loan, simply because they don’t know or don’t follow the regulations that are required themselves. And really, it’s not that tough to know the regulations and comply with them. Our viewpoint is that you get your wits around all of it and simply comply with the Fed and State mandates and then you can do these loans. So that is what we do and that’s why we promote this type of loan.
Almost all of the owner-occupied loans that we write have an “exit strategy”. We never used that term before the proliferation of Fed and State regulations in response to the recession, but here it is. We write these loans as either an 11 month loan for Bridge or Temporary loans, or for another Fed compliant term of 15 years. However since the inception of these programs the I would wager none will go to that full 15 year term. We looked at the statistics of the owner-occupied loans we have written that are serviced and the ones that had paid off lasted an average of 11 months. So, we make 15 year loans but they most likely will not last that long. The reason we have found they do not last the full 15 years is due to the way we have the loan structured. It is an interest only loan for the first 3 years, then on year 4 through 15 the loan converts to an interest plus principal loan. What this means is the monthly loan payment significantly increases on year 4 which is cause for the borrower to refinance out of the loan before this occurs. Nearly all borrowers look at this loan as a 3-year interest only loan, even though it is written as a 15-year loan.
One thing to mention that increases the security of these loans, is the fact that the Feds require they be impounded for the payment of property taxes and insurance. The Feds did get that one right. You know every month that those items are paid and not accumulating.
The Feds also require that the Borrower on an owner-occupied loan demonstrates an “ability to repay”. We don’t even write the loan if they cannot prove they can repay the loan. We turn down quite a few requests, even with a ton of equity, because they cannot prove their income.
Last item to mention is that the Feds mandate these borrowers do a Consumer Credit Counseling class before the loan records. The counselor takes the disclosures for the loan and does a budget talk with the borrower. It’s done over the phone and takes about 45 minutes to an hour. This was intended to make for a more informed borrower. Makes sense.
So, statistically, the loan to values are good, they have an ability to repay the loan, they have an exit strategy, they pay the property taxes and insurance monthly, they do a Consumer Credit Counseling class, and the properties will likely appreciate in the coming months and years.
That’s why these loans are a great investment.
We will always offer loans to homeowners that are owner occupants. It is an important segment of lending and a heck of a niche for our office. The Feds have brought about regulatory protections for this class of Borrower, but that is simply because they have determined home ownership to be such an important right and should be protected. It’s kind of like car seats for kids, seat belts, speed limits, food labels, movie ratings, warning labels on medications, etc., etc.
There are really just 2 quasi-objectionable regulations that apply to owner occupied transactions:
- The loans can be rescinded for up to several years if the correct disclosures were not made at the beginning of the loan. Rescinding a loan means that the Borrower gives back the principal and the Investor gives back the interest and the fees. There are lots of regulations, but the occurrence of legal problems with these loans is extremely rate. Plus we have Loan Document programs that are hard money specific and provide the necessary disclosures within the required timelines to be compliant in this matter.
- These loans have a longer runway to start the foreclose process. As these loans are required to be serviced, this is a servicing issue. The regulation requires you wait 120 days to begin the foreclosure process. After that it is regular foreclosure timing. From our experience, most investors allow 2-4 months before beginning the foreclosure process in any case. Also, in reviewing 3 years of this type of loan program through our office, 98% of the borrowers refinanced in less than 2 years.
So, statistically, borrowers do not rescind the loans in any significant numbers (we cannot find any mention of it on-line or with our attorney where a loan was actually rescinded), the loan to values are good, they have an ability to repay the loan, they have an exit strategy, they pay the property taxes and insurance monthly, they do a consumer credit counseling class and the properties will likely appreciate in the coming months and years.
So, if you hear mention of avoiding these loans, show whomever has said it these articles. These loans are important and a very good investment.
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