A Hard Money Guide- 7 Tips For Consumers

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.  Loan brokers are bound by specific guidelines laid out by State and Federal law. The laws are fairly complex and you should be aware that private investors not licensed by the either the California Department of Real Estate or the California Department of Corporations are probably not following the letter of the law.

Essentially, the lending guidelines for owner-occupied properties in California are:

    * 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 55% or less.  This means that your total monthly bills, including the new mortgage, should not exceed half of your gross monthly income.
    * The loan must show a material benefit to the borrower and improve their financial situation. 

    * The lender must determine ability to repay.  You must be able to afford the payments or the loan is considered predatory.

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

1- 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% (10% for second mortgages) above the corresponding US Treasury Security. 

2- Do not work with an unlicensed loan broker:  Loan brokers in California are licensed through the Department of Real Estate or the Department of Corporations (as a California Finance Lender).  There are many "foreclosure consultants" who pose as loan brokers, but they are not licensed.

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.  Any 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 lenders offer a Home Equity Line of Credit (HELOC).  Lines of Credit are excempt from some of the State and Federal predatory lending laws.  Be aware that these type of loans tend to be much more expensive, but may be the only financing available to you if you are in foreclosure.  Financing with such a high cost loan should be avoided 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.  High cost 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 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.  They provide many resources to the consumer.