It is critical for flippers and developers in California to understand the legal distinction between loans for owner-occupied and non owner-occupied properties.
The two loan types differ significantly in terms of their speed, structure and legislated compliance with California private money lending laws.
Understanding this helps borrowers avoid costly missteps.
An owner-occupied property is one the borrower intends to make their primary residence.
A non owner-occupied property is purchased for business or investment purposes.
It may be any of the following:
- fix and flip
- speculative build
- acquisition for short or long-term rental
- small multifamily development
- vacation or holiday home
Here’s why the distinction is important for borrowers and lenders.
Owner-occupied loans
In California and most other jurisdictions, an owner-occupied loan triggers consumer protection laws.
California’s are some of the strictest in the country and include:
Disclosure requirements
Borrowers are protected by strict legal requirements.
They demand lenders are transparent about rates, fees and loan structure including third-party fees, prepayment penalties, balloon payments and adjustable rate features.
Any changes automatically reset cooling off or waiting periods.
Quick closes are virtually impossible.
Mandatory waiting or cooling off periods
A three-day cooling off period exists after closing disclosure or refinances giving borrowers time for appraisal revisions or simple change of mind.
Rate and fee constraints
Loans are subject to ability-to-repay rules and fee limits.
Loans that exceed APR (annual percentage rate) may be classified as high-cost or non-qualified mortgages, ultimately prohibiting them or increasing lender liability.
Fees cannot be hidden which is why owner-occupied loans are cheaper but lack flexibility.
Documentation rigidity
The signifiant amount of red tape that exists for an owner-occupied loan is there to protect the borrower.
Requirements include verifying the borrower’s income, assets, employment and intent to occupy as well as meeting debt-to-income (DTI) compliance.
That is why these loans take so much longer to acquire.
And it is why owner-occupied loans are not a good choice for flips or short holds seeking fast approvals and flexible exits.
Non owner-occupied loans
The regulatory burden for non owner-occupied loans in California is much lower.
This includes properties purchased for investment purposes, business purposes, developments and flips.
If the borrower does not intend to live in the property, California law assumes a greater level of sophistication and understanding on their behalf.
Hence, there is a much lower need for protection and greater freedom given to the lender in terms of the loan contract.
This benefits both borrower and lender.
It is also why so many non owner-occupied properties are hard money loans, whether they be flips, developments or other investor business models.
Non owner-occupied loans:
- offer speed and flexibility
- are asset-based underwritten rather than relying on credit history
- require much less documentation
- are customizable
- are designed for short-term investment horizons
Common borrower misunderstandings
In California, there is no scope to be vague or unsure of your intentions regarding the occupancy of a property when taking out a loan.
That’s because the terms and conditions of the two loan types vary so markedly.
Sentiment such as “I might live there later” or “I’ll decide after completing the renovations” are not possible.
Occupancy intent is determined at the origination of the loan and must be stringently followed.
Misrepresentation may cause:
- loan denial
- delays
- forced restructuring
- compliance issues for all parties
Deliberate false occupancy statements may trigger a loan recall with civil penalties and in some cases criminal charges.
Applying for a non owner-occupied loan
Prepare to be asked your occupancy intentions when you apply for one of these loans.
It should be one of the first questions asked and is a sign of the lender’s professionalism.
Respond clearly and with conviction to save time and enhance your chances of approval.
The laws in California are there to protect both lender and borrower and compliance is non-negotiable.
Neither owner nor non owner-occupied loans should be disingenuously explored as a loophole to gain advantage.
Aside from legal consequences, the reality is that both types of loans are best suited to the properties for which they are designed.
Get finance and support today
A non owner-occupied loan is a non-negotiable for flippers and developers in California.
A hard money loan is perfectly tailored towards fix-and-flips.
It can be approved quickly offering flexibility, customizability and is designed for an early exit.
Equidy is a hard money lender and can approve hard money loans in as little as 48 hours.
They will guide you through the process with speed and clarity in an effort to finance you as quickly as possible.
They stand by their core belief that anything is possible and they are determined to prove it every single day.
Even in difficult economic times, they love to reward entrepreneurship and strive to see their clients realize their wealth creation dreams.
But Equidy‘s services do not end there.
They have had an intimate and personal history with all aspects of real estate and property development in California for more than 40 years.
It makes them the ideal mentor or partner for your real estate wealth creation journey.
Their prime concern is to see you maximize the return on your investment without putting yourself at unnecessary financial risk.
Equidy enjoys long and established relationships with serious investors, sellers and real estate professionals while leveraging their reputation and trust, using clear communication to minimize the risk to all parties.
Contact Equidy today to book your free strategy call.
