BUSINESS PURPOSE EXEMPTION
Normally a consumer credit transaction will be subject to the provisions of the Federal Truth in Lending Act (“TILA”), Regulation “Z”, the Real Estate Settlement Procedures Act (“RESPA”), and Regulation “X”. TILA and Reg “Z” provided a number of exemptions; one of which is the business purpose exemption. The general public often refers to them as, “Hard Money Loans”. For example, Credit transactions involving extensions of credit primarily for business, commercial, or agricultural purposes. A seasoned real estate investor with 2+ rental properties (or if purchasing a 2nd rental property) will be held as an exemption to these rules in that their business is the ownership of real estate in their personal name. For qualification purposes, they will need to provide the same documentation for what is considered a standard Non-owner Occupied product.
BUSINESS PURPOSE LOAN REQUEST
Nationwide Mortgage will consider mortgage loans secured by a Borrower’s Personal Residence analyzing the proposed loan transaction as a whole for classification for a Business Purpose Loan provided that:
1. The Borrower is currently self-employed or will be purchasing a business or franchise;
2. The primary purpose of the loan is more than one-half (50%) proceeds are employed for the stated business purpose;
3. The Borrower’s primary occupation is or will be related to the current business or any acquisition for entry into or expansion of a business;
4. Documentation is presented in the form of contracts or offers to purchase that provide the reason for the loan and how loan funds or a portion thereof will be deployed;
5. The Borrower’s statement of purpose for the loan; and
6. Loan funds are credited to borrower’s business directly through the Settlement Statement, also know as the HUD-1, at closing.
EXAMPLES OF BUSINESS PURPOSE
Specific examples of acceptable needs that may be fulfilled by a Business Purpose Loan:
1. A loan to expand a business.
2. A loan to improve a principal residence by building out a business office.
3. A loan to buy equipment specific to a business.
4. Loans on Property of twenty-five (25) acres or more.
5. Investment in a Corporation, LLC, or other type of entity from which the Borrower intended to personally benefit.
6. A borrower with 2+ rental properties (or if purchasing a 2nd rental property) may use either the Debt-Service Coverage Ratio method for the subject property on its own or an aggregate of net rental income for all rental properties to qualify.
TYPICALLY REQUIRED DOCUMENTATION
The following is required to document a Business Purpose Loan request:
1. A complete and signed 1003 Application clearly delineating business debt obligations from personal ones. Note that ALL owners on title at the time of application are required to apply.
2. A hand written statement signed by the Borrower(s) attesting in detail the use of all loan proceeds including the percentage for each purpose. The statement must also include what the resulting economic gain will be in the Borrower(s) estimation.
3. Borrower(s) must clearly state as an individual the relationship to the business that employs the Borrower(s) and provide any documentation relating to that business entity.
4. As a current business owner a CPA letter attesting to number of years of association.
BUSINESS PURPOSE EXEMPTION
Consistent with Reg X & Reg Z’s Official Interpretation to §1026.3(a) where as an exemption exists for, among other items, compliance to Ability-to-Repay Laws (ATR) under certain circumstances. A loan coincides with said exemption when it is against a non-owner occupied investment used to “(i) acquire, (ii) improve, or (iii) maintain” said property.