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Owner Occupied Principal Residence Lending

(California Only)

Let me start off by saying that I will always do loans to homeowners that are owner occupants. It is an important segment of lending and a heck of a niche for my 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 4% from what we call “A” paper lenders like Wells Fargo, Chase, B of Am, etc.  Most are turned down due to something in their credit. Second most are turned down due to income. 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 backed off this type of loan by the additional regulations concerning these loans that one should be aware of and comply with.  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. Yeah, there are additional regulations, but my viewpoint is that you get your wits around all of it and simply comply with the Fed and State mandates and then you do these loans. So that’s what I do and that’s why I 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 15 years loans but I would wager none will go to that term. I 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 the loan is 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.

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One thing I must mention that increases the security of those 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 loans 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 to me.

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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.

owner occupied principal residence

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:

    1. 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. I asked our attorney about the incidence of this and he had no answer.  I have never heard of it happening. I have also done tons of research on-line on the subject and cannot find case law that applies. That is proof that, while there is lots of regulation, the occurrence of legal problems with these loans must be minimal as I cannot find anything on the subject.  We have Document programs that are hard money specific and provide the necessary disclosures within the required timelines to be compliant in this matter.
    2. 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.

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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), 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.

Ken Walker & Forest Tardibuono
“The Guys in the White Hats”

Sun Pacific Mortgage & Real Estate

(707) 523-2099
800 Mendocino Avenue #2, Santa Rosa, CA 95401

CA BRE License # 01464899
NMLS # 360993