All loans we offer are backed by real estate as the collateral. These real estate properties can be non-owner occupied or owner occupied, also known as investment properties or primary residences. However, the “purpose” of each loan is solely based on the use of the funds by the borrower. It is this “purpose” that a majority of the regulations we have to comply with, are based on, under Dodd-Frank.
“Business Purpose” loans are secured by real estate property, where a majority of the loan funds are used or earmarked for business use. Such as:
- Buying or making improvements to investment property
- Paying off business debts
- Getting capital for their business
- Purchasing a business
- Etc.
There are precise regulations that we must follow for a Business Purpose Loan, as well as a Consumer Purpose loan. A Business Purpose loan program allows for pre-payment premiums to be enforced, are more flexible in the length of loan allowed – compared to a consumer loan, and this loan program also allows for a default rate. We have specific attorney prepared, hard money loan documents that are used for this loan program.
There are many scenarios where borrowers come to us to pull cash out of their existing primary residence, for business use. This is not a consumer purpose loan if a majority of the new loan will be used for business purpose. But this does have to be documented!
To document that a borrower is using their loan funds for business use (whether the collateral is a primary or investment property), in addition to the borrower filling out a business purpose loan application, we require the borrower provide a handwritten, dated, and signed letter stating their purpose for getting the loan. This same letter, as well as the business purpose loan application, is then given to Escrow/Notary to have the Borrower sign and date newly, along with their final loan documents. In the Borrower’s final Loan Docs there is another form that gets filled out and signed by them, again confirming their purpose for getting the loan and their occupancy of the subject property.
Proper documentation of a borrower’s purpose for getting a loan is a key segment of the loan process. Our next Newsletter will further explain “consumer purpose” loans.
We hope this information is helpful, and we look forward to continuing to work with you on real estate investment opportunities.
