Private/Hard Money for Debt Consolidation: Fresh Start

By Dan Harkey

Real-life example: a successful closing

Debt consolidation loans may be for consumers, businesses, or a combination. A funded loan usually lowers the borrower’s outgoing monthly payment obligations. Paying off accrued credit cards and miscellaneous debt should allow the borrower to improve their credit rating and obtain a long-term bank loan.

Private money loans act as a much-needed bridge, relieving borrowers from the stress of multiple financial obligations. This bridge leads them to the other end, where they can smoothly navigate the institutional loan process and secure a long-term loan. Additionally, if the loan is a second lien, the average interest rate between the first and second is calculated to show a ”net-effective rate.”

The mortgage broker states:

My client runs a commercial bakery. It operates from 3 a.m. and delivers bakery goods to donut shops, grocery stores, and boutiques by 7 a.m. Its customer base is within a 10-mile radius of the bakery. They were forced to shut down during the COVID-19 fiasco but had ongoing expenses, primarily fixed since their employees were laid off. They hobbled along but accrued debt of about $110,000 through bank loans, a government loan, and credit card debt.

With their business showing significant improvement, the burden of accrued debt at an average interest rate of 22% has become a pressing issue. They need some breathing room and a fresh start, a feeling of relief and peace of mind that comes with debt consolidation.

They need a second trust deed on their home to eliminate the high interest rate accrued debt. Their house is valued at $1,500,00 with a $650,000 first long-term first trust deed. They request a $300,000 second trust deed, payable interest only, due in 36 months. The loan-to-value ratio is 63% within the parameters of the lender.

Since most of the proceeds will be used to pay off business debt, the loan is not considered a consumer-purpose loan subject to Trust in Lending (TILA).

The lender responds:

At our lending institution, we often encounter situations like this, where small entrepreneurs find themselves in a bind due to unforeseen circumstances, such as the COVID-19 fiasco. Unfortunately, during such times, the big corporations are considered systemically important and, therefore, exempt from the shutdowns, leaving the small business owners to fend for themselves.

Our due diligence process is comprehensive, including a review of the borrower’s application, background search, credit report, application, financial statement, and bakery financials. This thoroughness should instill confidence in our borrowers.?? We are committed to providing enough funds to stabilize their business and personal lives.

One key aspect of our due diligence is to ensure that this loan is considered a business-purpose loan rather than a consumer-purpose loan. Business-purpose loans are loans made on 1 to 4 residential units of real property where the loan proceeds are used primarily for business purposes. This distinction is crucial. It means that more than 50% of the loan proceeds must be used for business purposes, with the remaining portion for consumer purposes.

A consumer-purpose loan is one in which the proceeds are used primarily for personal, family, and household purposes. Our company does not make consumer-purpose loans because the regulatory environment is so strict against the lending company if a borrower defunds.

Let's go ahead and get started. The process is straightforward and efficient; the underwriting closing time is 14 business days. The borrower must sign a letter of interest, some disclosure documents, and pay for an appraisal. This should give you a sense of the normalcy and efficiency of our process.

Thank you,

Dan Harkey

Educator & Private Money Lending Consultant

949 533 8315 dan@danharkey.com

Visit www.danharkey.com

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