Why Private Lenders Do Not Lend on Owner-Occupied Homes

Reason #1 – Government Regulations and Compliance

The reason private lenders do not lend on owner-occupied homes is because of government regulations and compliance requirements. Loans secured by a borrower’s primary residence or 2nd home are consumer-purpose mortgages, which are heavily regulated by federal laws. To make these loans, lenders are required to collect a lot of documentation and verify the borrower’s income.

Lenders that offer consumer home loans have to spend lots of time and money just on compliance. The lending company is first required to get an NMLS license in one state, and every loan officer in the company must be licensed as well. If the lender wants to originate loans elsewhere, they have to go through a registration process in each state throughout the country. Additionally, they have to submit reports to regulators about every single loan application and every loan closed.

Some states perform annual audits, which takes an enormous amount of time and resources to deal with. It’s just not realistic for private money or hard money lenders to operate a lending business with that much complexity. It makes more sense for them to focus on business-purpose lending which doesn’t have as much regulation.

Reason #2 – Litigation Risk

Aside from compliance requirements, there is a huge risk of litigation when private money or hard money lenders fund an owner-occupied home loan. There have been numerous legal cases since the great recession where a homeowner defaulted on a private mortgage and hired an attorney during the foreclosure process to sue the private lender with a claim of predatory lending practices. In some of these cases, the judges have ruled in favor of the borrower who is at risk of losing their home.

The probability of a judge ruling against the private lender may be greater in certain states and jurisdictions throughout the country, but with all the federal consumer mortgage laws that were enacted in 2010, homeowners typically have the upper hand when it comes to litigation. The federal consumer mortgage laws protecting homeowners don’t apply to real estate investors, so it’s much safer for a private lender to lend on investment properties.

Owner-Occupied Loan Defined

The federal consumer laws apply to properties with up to 4 units, not just single family homes and condominium units. If you’re planning to buy a duplex to live in one unit and rent out the other, that’s owner-occupied, not an investment property. The same goes for a triplex and fourplex. Anything less than 5 units is classified as residential property, not multifamily.

In addition to the occupancy, the loan purpose is the other key factor that determines whether a private lender will consider your loan. If the loan is for a consumer purpose, as opposed to a business purpose, private lenders will not consider it. Here are a few other scenarios that are considered to be consumer purposes.

  1. You’re buying a 2nd home for your family.
  2. You want to cash out equity on a rental home, but the tenant is your family member.
  3. You need a loan to build an accessory dwelling unit in your backyard which will be rented out, but you occupy the main house.
  4. You’re buying a vacation rental that will be rented a few times per year, but it will mostly be used by your family and friends.

These are all considered to be consumer purposes.

Owner-Occupied Private Lending Exceptions in California

Although the general rule is that private lenders won’t consider owner-occupied homes due to federal regulations, there are a few exceptions, mainly in California. The state of California has some unique mortgage lending laws that enable private lenders to offer private money consumer-purpose mortgages. The guidelines and pricing are similar to investment property loans, but the lenders require full documentation and income verification.

For this guide, we don’t want to spend too much time covering just one state. We’ll publish a separate detailed guide about California’s private lending options for owner-occupied homes, but we want to quickly mention the 2 common loan types before moving on.

Business-Purchase Loan Secured by a Primary Residence

The first owner-occupied private mortgage program is a business-purpose loan secured by an owner-occupied home. Private lenders commonly offer equity cash out loans in 1st or 2nd position, secured by the borrower’s primary residence in California. The maximum combined loan-to-value is typically 65%. So long as the funds are to be used for a business or investment purpose, the lender doesn’t need to collect all the documentation and income verification which are required for consumer-purpose mortgages.

Primary Residence Bridge Loans

The other owner-occupied home loan that is offered by many California private lenders is the primary residence bridge loan, also known as “buy before sell”. This is for homeowners who want to move to another primary residence within the state, but they need to buy that new home before selling their current home.

So long as there is lots of equity in the current home, a private lender will provide a loan to purchase the new primary residence, typically closing in just 1 week. Within 1 year after the purchase, the borrower has to sell the departed home and refinance with a long-term mortgage lender.

This is a great solution for many homeowners, especially when the market is hot and cash offers are required to get an offer accepted.

Non-QM Lending

Outside of California, there is no such thing as private money or hard money lending for owner-occupied homes, at least to our knowledge at the time of this writing in late 2022. For those who cannot qualify for a conventional home loan, the primary alternative option is called “non-QM” lending. QM stands for qualified mortgage, so non-QM loans are those which fall just outside the standards of a traditional qualified mortgage.

Non-QM lenders are not institutional, but they are also not private lenders. They accept borrowers with lower credit scores and ones that have had a foreclosure or bankruptcy in the past. They accept borrowers who are self-employed, have seasonal income, and have other unique situations.

Non-QM loans are only for a property purchase or refinance. It’s not for rehab or construction projects. If you’re purchasing a home, you’ll typically need to have a cash down payment of at least 20%, and some lenders require 10%. For a refinance loan, the maximum loan-to-value is 80%. As you probably guessed, Non-QM loans have higher interest rates and fees than traditional mortgages, but historically they have not been as high as private or hard money loans.

Loans that require non traditional income documentation like bank statements typically have higher rates and fees.

Qualifying for a Non-QM Loan

As with all consumer home loans throughout the country, Non-QM lenders must qualify the borrower based on the ability to repay. They require full documentation and income verification. If you’re applying for a non-QM loan, You must show the lender that you have sufficient income to make the mortgage payments and still have enough left over for other living expenses. For income verification, some non-QM programs only require recent bank statements instead of tax returns. You must have income to qualify for a non-QM loan.

Reverse Mortgages

If you’re over the age of 62 and don’t have employment, a reverse mortgage could be an option. You don’t have to make monthly payments with a reverse mortgage. You just need to have enough money to pay the property taxes, insurance and maintenance.

How to Find Owner-Occupied Home Lenders

If you’re seeking financing for an owner-occupied home, you can find a few lenders on our website. There are two options for using our platform.

Option 1: Browse Lenders
Search on our site for owner-occupied lenders. View each lender’s profile to learn about their loan programs and guidelines, and make contact with each out directly. Send an email, call, or visit their websites.

  • Visit the Browse Lenders Page
  • Select ‘Residential Owner-Occupied’ from the loan type list
  • Enter a state
  • Click the VIEW PROFILE buttons
  • Look for the green CONTACT button/tab

Browse Lenders 


Option 2: Create a Loan Request
Fill out a questionnaire with information about your financing needs. You can then browse lenders and invite a few of them to view your deal. Or ask us for recommendations; we’ll review it and invite a few select lenders that we feel may be a good fit.

We do NOT receive commissions or referral fees for owner-occupied home loans. 

Get Started


Featured Lender Offering Non-QM Owner-Occupied Loans

Griffin Funding logo

Griffin Funding (NMLS ID 1120111) offers a diverse range of Non-QM (non-qualified) mortgage products that allow you to qualify using better representations of your reliability as a borrower. Such representations may include bank statements, rental income, your liquid assets, or your credit history. Non-QM mortgage products can help you finance your purchase, without having to jump through unnecessary hoops.

Griffin Funding offers Non-QM loans in 20+ states.


Owner-Occupied Hard Money Loan Alternatives

Purchasing a home that you plan to live in, refinancing the mortgage on your primary residence, or getting an equity cash-out loan for personal expenses are all considered to be consumer mortgages. Due to strict government regulations and compliance requirements for consumer mortgages, private and hard money lenders do NOT offer loans for owner-occupied homes or 2nd homes.

There are a few exceptions in California and a few other Western states which we’ll cover in a separate piece. For this guide, we want to provide two alternatives for homeowners in most states throughout the country.

Non-QM / Non-Prime Mortgages

The first alternative is called non-QM, also known as non-prime. QM stands for qualified mortgage, so non-QM loans are those which fall just outside the standards of a traditional qualified mortgage. This includes loans for borrowers with low credit scores, self-employment, seasonal income, and other unique situations. One of the main qualifications for non-QM loans is showing the ability to pay. So you qualify based on income and your debt to income ratio. For income verification, some programs only require recent bank statements instead of tax returns.

If you are purchasing a home with non-QM financing, you’ll need to have a cash down payment of at least 20% of the purchase price. Also, as you probably guessed, Non-QM loans have higher interest rates and fees than traditional mortgages. However, they are not as high as private or hard money loans.

You can find a few non-QM lenders here on our website. Select ‘Residential Owner-Occupied’ from the loan type list, then enter a state or major metro area.

Home Equity Sharing

The second alternative to private lending for owner-occupied homes is equity sharing, also known as home equity contracts. This is only for cashing out equity on a home with amounts up to $500,000. It’s not for purchasing a home, although you can cash out equity on your existing home to buy another property.

The way it works is the lender will provide you with the cash out funds in exchange for a percentage of the home’s appreciation over a 10-year or 30-year term. So when the loan is paid off, the lender will receive the principal loan amount, plus a percentage of the increased value over the contract term, typically ranging from 15% and 35%.

One of the main benefits to the equity sharing program is you don’t have to make any monthly payments. The lender will put a lien on the house in 2nd or 3rd position, but it’s not a mortgage. You don’t pay any interest, but you will have to pay an origination fee. Here are the typical terms:

  • Loan Amounts: $30,000 to $500,000
  • Origination Fee: 2% to 4%
  • Maximum CLTV (combined loan-to-value): 80%
  • Minimum FICO Score: 600
  • Contract Term: 10 to 30 years
  • No Prepayment Penalty

These equity sharing loans are NOT available in all 50 states. As of late 2021, we’ve found it’s available in 19 states:

  • Arizona
  • California
  • Colorado
  • Connecticut
  • DC
  • Florida
  • Illinois
  • Maryland
  • Massachusetts
  • Michigan
  • Minnesota
  • New Jersey
  • New York
  • North Carolina
  • Oregon
  • Pennsylvania
  • Utah
  • Virginia
  • Washington

How to Find Home Equity Sharing Lenders

We have a few of these equity sharing lenders on our website, but since these loans are not mortgages, you won’t find them in the lender searches.

  1. Click Services in the main menu to access our Service Provider directory
  2. Click Investor Services
  3. Look for the Filters section, click Home Equity Sharing
  4. View each company’s profile to learn about their program
  5. Click the green CONTACT button and reach out to the company directly

Please remind each company that you found them on PrivateLenderLink.com.