Using Hard Money for Owner Occupied Rental

[Justin Tyler]

I am planning to use a combination strategy of BRRRR and house hack for my first deal and want to use hard money to purchase the property. I was told by a few hard money lenders at a local REIA meeting that it will be nearly impossible to find hard money lenders willing to finance a property that I plan to live in. They said something about not being able to foreclose on the property if for some reason I filed for bankruptcy due to being owner occupied.

I am hoping to some of you in the BP community can tell me if this is true or not? If this is true, is this only the case if I plan to live at the property before refinancing and paying back the hard money lender? I don't see why it is an issue for me to live at the property once I refinance. I appreciate any feedback, thanks in advance!

[Jeff S.]

Sorry, but this is dangerous advice. The reason most hard money lenders won’t make a loan like is this not because they are “super rich … with hard outline rules,” but because it’s the law.

Unfortunately, the law applies to everyone.

To add context, you’re asking for a consumer purpose loan, @Justin Tyler, as opposed to a business purpose, i.e. investment property, loan. This could mean an NMLS registration, state license requirements, compliance with RESPA, TILA (Dodd-Frank), the SAFE Act, and a whole host of disclosures and restrictions to which business purpose loans are exempt. Most private/hard money lenders don’t want to deal with this and I doubt your mom or dentist wants to either. In addition, there is the foreclosure issue you mentioned.

Foreclosing on an occupied property can literally take years, especially if the homeowner contests the foreclosure. This is particularly true in mortgage states such as Delaware, if that’s where your property is located. I know you don’t think you’d fight right now, but if times got tough, I bet you’d reconsider. Here, a good attorney would ask your lender to show compliance with all the restrictions I mentioned above. What?!?!? Your dentist didn’t follow these?

This is not to say that your mom or dentist would necessarily get caught if things went well or if you could refinance them out quickly. Is it fair to ask them to take a chance? It actually might, but I’d speak to a good lawyer on this -- with them -- and don’t try to do it yourself.

This is also not to say that there are no private/hard money lenders that make these types of loans. There are, but not many. The self-employed, commissioned sales people, anyone with good but variable income, can all have a hard time borrowing conventional money (i.e. thru a bank) and there are lenders who cater to them. Also, are you sure a bank won’t loan to you? Have you spoken to any brokers?  Is the property in that bad shape?

I know a few hard money lenders who make these loans but only locally (and admittedly in non-judicial states, where it’s easy to foreclose). You could continue to call around and might get lucky, but it will take some effort. I suggest looking through the lender list in Scotsman Guide. Also call the AAPL and ask if they know if any of their lenders will make an owner-occupied loan in your area. They have a lender directory too, but it will save you time to call. (Full disclosure, we are AAPL members but we don't make these loans.)

Best of luck to you, Justin.