Hard Money: 7 Tips For Borrowers

Hard money loans or private mortgages can be an excellent way to cure a notice of default for homeowners in California if you have equity.  Now understand that a hard money loan broker is bound by specific guidelines laid out by the California Department of Real Estate of the California Department of Corporations.  Essentially, the lending guidelines we follow for owner-occupied properties in California include:

• A loan-to-value (LTV) of 70% or less.  This means that you can not borrow more than 70% of the appraised value of your home.
• A debt-to-income (DTI) ratio of 50% or less.  This means that your total monthly bills, including the new mortgage, can not exceed half of your gross monthly income.
• The loan must show a material benefit to the borrower and improve their financial situation.

Here are the seven tips for consumers when applying for a private money mortgage:

1- Avoid California High Cost Loans: This is defined as a loan where the fees exceed 5.99% of the loan balance or the annual percentage rate exceeds 8% above the corresponding US Treasury Security.  Succinctly put, a 30 year loan for $ 240,000, applied for in December of 2006, should not have fees exceeding $14,375 and an annual percentage rate not greater than 12.6%. This means your note rate, or the rate you are charged should not exceed 12%.

2- Dealing with an unlicensed loan broker:  Loan brokers in California are licensed through the Department of Real Estate of the Department of Corporations (as a California Finance Lender).  There are many "foreclosure consultants" who pose as loan brokers.

3- Disclosures under the Truth-In-Lending Act (TILA) should be mailed to you within three days of application or a review of your credit report. TILA disclosures include a good-faith estimate of fees, a California Mortgage Loan Disclosure Statement, and an itemization of charges financed.  If you are reading this article online, you probably have access to e-mail.  Have the loan broker e-mail the disclosures to you immediately.

4- Sudden loan changes due to a loan decline must be communicated in writing.  Under the Fair Credit Reporting Act, you are entitled to a written explanation for the loan denial.  New terms must be redisclosed to you with the TILA documents immediately and no sooner than three days before your loan documents are prepared. Again, ask to have all of these documents e-mailed to you when possible.

5- Be wary of lenders or brokers who make "equity-based" loans with no regard for your ability to repay.  Your ability to repay is identified by your debt to income ratio.  Lenders who make no attempt to identify how you will repay the loan nor have an "exit strategy" for you have not met this obligation.

6- Many hard money lenders offer a Home Equity Line of Credit (HELOC) as a ploy to circumvent the TILA disclosures.  While this is "cute", it violates the spirit of the law.  Stay away from the HELOC as a financing tool unless absolutely necessary.

7- Finally, lenders like to include a prepayment penalty clause with the loan.  This is to insure that their investment return will be secure.  Don't sign loan documents that include a prepayment penalty for more than 12 months.  These loans are "band-aid loans", designed to help you from a bad financial situation.  Most sub-prime lenders will offer much better terms than the hard money loan with a 12 month good payment history.  If you make all of your payments to the hard money lender in a timely fashion, you should be able to refinance out of the "Band-aid loan" to more favorable terms after a year.  A longer prepayment penalty than 12 months will restrict your ability to do that.

The California Mortgage Association is a professional organization which promotes and supports the community-based lenders and brokers.  The author advises consumers to seek out a member of this organization.