Business Purpose Loans & How They Work - The Ultimate Guide
Business purpose loans are a unique mortgage solution for your next purchase or refinance.
Independent Home Lending has helped hundreds of borrowers just like you achieve both their short-term and long-term financing goals by using business purpose loans.
By providing both flexibility and efficiency, business purpose loan programs have been popularized by real estate investors. However, recently business purpose loans have become increasingly popular with those who break the mold for traditional lending programs.
Similarly, business purpose loans often require less rigorous criteria for qualification, making them ideal for most borrowers.
If you are currently exploring your financing options, here are some reasons why you should consider a business purpose loan.
How Do Business Purpose Loans Work?
Whether you’ve spoken with a mortgage broker or compared various loan programs online, you probably have never stopped to consider if the need for a new loan is for consumer or business purposes.
While identifying the purpose for any hard money loan might sound silly, it can make a significant impact on whether making the loan is even possible. Many hard money lenders only originate business purpose loans.
A business purpose loan is a form of financing where the loan is secured by real property and the funds are reserved for legitimate business purposes.
These types of loans are originated by private lenders, individuals, or trusts who set the requirements for qualification. Business purpose loans are less regulated compared to traditional lenders including banks and credit unions.
Additionally, business purpose mortgage loan programs normally have shorter repayment periods, unlike your typically 30-year fixed rate mortgage. They can also have stricter equity criteria and higher interest rates to help mitigate against higher risk factors.
When qualifying for a business purpose loan, lenders often place a greater emphasis on the collateral that’s securing your credit request as opposed to ripping apart your credit report or sources of income.
Business Purpose vs Consumer Purpose Loans
Differentiating between a business purpose mortgage loan and a consumer purpose mortgage loan is extremely important. Most hard money providers only originate loans that are for business purposes.
Consumer purpose loans are those used to fund personal financial goals such as going on vacation, paying off other high-interest consumer debt, or buying a new home that you plan to live in.
One of the biggest reasons most hard money lenders don’t offer consumer purpose loans is because then they are required to comply with certain legal and regulatory guidelines.
For example, the TILA and Real Estate Settlement Procedures Act Integrated Disclosure (TRID) rule requires hard money lenders to provide borrowers both a Loan Estimate and Closing Disclosure for consumer purpose loans.
It also requires hard money lenders to follow specific waiting periods and verify borrowers meet the mandated Ability-To-Repay (ATR/QM) criteria before a loan can be consummated. These added rules make hard money consumer loans extremely restrictive and can penalize lenders who fail to comply.
Types of Business Purpose Loans
Types of Consumer Purpose Loans
Pros and Cons of Business Purpose Loans
It’s important to compare a variety of loan options to examine the advantages and disadvantages each source of financing can provide. Business purpose mortgage loans are no exception. Let’s look at just a few of the pros and cons to weigh when considering a new business purpose loan.
Advantages of Business Purpose Loans
The first major advantage of any business purpose loan is how easy it can be to apply. Much like other types of mortgages, hard money providers will require you to complete a standard application when submitting your loan request.
However, unlike other financing solutions, you won’t have to jump through a billion hoops to get approved. That’s because most hard money lenders have fewer documentation requirements, caring more about the value and condition of the property than other factors.
Similarly, hard money lenders have flexibility on what criteria they require to approve borrowers for a new business purpose loan. Since loan approval is weighted heavily on the value of the collateral being provided, having less than pristine credit doesn’t automatically disqualify you from being approved for financing.
One last benefit of utilizing a business purpose loan is that your loan can be approved and funded in just a few short days. This makes business purpose loans ideal for borrowers who have had other financing fall through and are in a pinch and need access to quick cash.
Because hard money providers require less extensive documentation and don’t have to adhere to strict regulatory waiting periods on business purpose loans, you can get access to funding super-fast.
Disadvantages of Business Purpose Loans
While there are countless reasons to obtain a business purpose loan, this type of financing isn’t without a few drawbacks.
For starters, business purpose loans might carry higher risk compared to other financing solutions. Since your hard money lender will be taking on additional risk, they may try to offset that risk by charging you a higher interest rate or requiring you retain a certain amount of equity in the property you are using as collateral.
Large down payments are common with business purpose mortgage loans to help manage risk. Similarly, you may have to repay your loan over a shorter period compared to other mortgage solutions. This can sometimes be stressful as it can sometimes take time for a business to show signs of improvement from a new cash infusion.
Private business purpose loans are a great financing tool for borrowers who require quick access to funding or who need a less restrictive, alternative source of financing.
If you are looking to obtain a new business purpose loan, it’s important to discuss with your lender the purpose of your loan to ensure it’s for a bona fide business purpose.
Many hard money lenders will only offer business purpose loans so it’s important to do your research and partner with a lender that truly understands your financing needs.
One big advantage to working with Independent Home Lending is that it’s a full service mortgage company with loan programs that fit any need you might have.
As a direct lender, Independent Lending cuts out the middleman, allowing you to close on your new business purpose loan with ultra-fast speed. Contact us for more information.
Frequently asked questions about our business purpose loans
According to the Truth In Lending Act its based on the purpose of the loan and not the type of property, terms or location. The question to always ask is what will the money be used for? Generally speaking, if the funds from the new loan will be used to generate income then it will be considered business purpose.
When looking at the number of units for a rate and term refinance, it can be tricky because the owner may be living in one of the units. Typically a owner-occupied two-unit could possibly be considered consumer purpose. Three or more units could be considered for business purpose use. There are other factors in addition to units that could determine if business purpose or consumer purpose.
It’s case by case, however for self-employed borrowers we typically we ask for company documentation such as a business license, Articles of Incorporation, or website address.