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Why do we ask loan applicants what is the purpose of the loan?

Posted by Jim Emerson

Jan 27, 2023 9:00:00 AM


You will have noticed that when applying for a loan with almost any financial institution or hard money lender in the US you will be asked for the purpose of the loan. Some borrowers know why that’s important, but some others do not. Moreover, some of our loan applicants do not believe it is any of our business to know on what they will use the money! Because since all our loans are guaranteed by real estate, they think we are being too nosey.

Nonetheless, it is important we explain that there are several reasons why a lender needs to have this crucial piece of information.

The law requires we know the use of the loan proceeds.

First, you should know that different laws and regulations apply to loans of different types. Legally there are two types of loans: consumer loans or business purpose loans. The use of the loan proceeds, not the nature of the collateral, determines the loan purpose.

In the case of AMI Lenders and its real estate loans guaranteed by differing kinds of real estate, the following becomes relevant to us as private money lenders:

  • If one of our clients finances the purchase of a home, through one of our mortgages; and they will occupy this house or apartment as their primary residence, this type of loan classifies as a “consumer loan.”
  • If our client is instead buying a house as a rental property, then this real-estate backed loan will classify as a “business purpose loan”.
  • If our client is borrowing money to pay off personal debt through a “home equity line”, that classifies as a “consumer loan”.
  • If our client, however, is pledging a rental property they own and the purpose of the loan is to make repairs to the rental property, that classifies a “business purpose loan”.

The above examples exemplify why it is relevant to us to know the purpose of a loan during an application process. Furthermore, there are far more laws that govern consumer loans than those that govern business purpose loans.

The loan purpose will most likely have an impact on the loan terms.

Most lenders set interest rates for loans based on your loan purpose. For instance, a consumer lender recently (as of November 2022) quoted differing interest rates depending on the loan purpose: a new auto loan purchase had the lowest APR, a personal loan for a debt consolidation had a more expensive APR, and, lastly, a wedding loan had the most expensive APR.

The same applies when you are looking at a business purpose loan duration: a 36-month loan will be more expensive than an 18-month loan.

We have a moral obligation to warn our client if we believe they’re making a mistake.

While not a law, at AMI Lenders we never want to approve a loan if, in our opinion based on decades worth of experience, it’s not a wise decision by our client.

We had a request to lend $250k to a lady and the purpose was to invest in her boss’s business. We questioned her extensively. We discovered she was simply giving the $250K to her boss. Not buying into the business, not lending her boss the $250k; just giving the money to her boss. Her boss then confessed she had severe health issues, and the symptoms were diagnosed as fatal. Of course, we declined the loan, and our client was thankful we questioned her about the use of the loan proceeds.

We could provide you with several other examples of loans we’ve declined because, in our opinion, the loan was not in their best interest.

At AMI Lenders, we try to do the right thing even if no one sees it! Our attitude is if it isn’t in our client’s best interest; it’s not in our best interest either.



If you are looking for a hard money residential loan or commercial loan (“una hipoteca con un prestamista privado” in Spanish) in the Houston area, look no further. At AMI Lenders, our advice as mortgage lenders is always geared toward financing the right investment property at the right price, for the right reasons and with the appropriate loan terms.

If you want to purchase a property in Houston and its surrounding areas, consult with AMI Lenders. We are one of Houston's fastest hard money lenders when it comes to closings, and we will become your financial ally. We fund our loans and can close loans as fast as the law allows. Houston Borrowers will also have difficulty finding better rates for hard money loans or private loans than those we offer.

We want our customers to succeed and take advantage of the financial opportunities provided by investing in real estate. Visit our website today and fill out an application for a loan backed by a mortgage. We speak Spanish, by the way.

Topics: hard money lenders, houston, loans, AMI Lenders


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