Understanding a California Hard Money Loan In San Diego
The topic of hard money and how it works, is frequently a point of discussion when talking about private financing. First, hard money is frequently called private money.
Below you will find a discussion about the policies of San Diego hard money, and the details of obtaining construction loans, purchase transactions, refinance loans and the overall procedures pertaining to a hard money loan.
Typical ideas associated with a private money loan must be explained. The private loan must have a low LTV (loan to value) ratio. This is due to the basis of the loan being weighed upon the equity available for the property being promised as collateral.
Most of these loans are written for 65% LTV or lower, which means the loan amount must be 65% or less of the total value of the property. The property is going to have to be marketable. Some private lenders and investors will consider a property that has a low enough LTV even if it is in an area that is not as marketable if the risk is low enough.
Also, the person seeking the loan must have the ability and means to repay the loan. The stronger the collateral and the ability of the borrower to make payments will usually make a hard money loan worthwhile.
As with any transaction, the fees,terms and rates will vary.
For some general insight, rates will vary anywhere from 9-15% depending on lien position, property type and overall risk of the transaction. The terms written are typically much shorter than conventional loans with terms ranging from 1-3 years on average. Fees will typically be anywhere from 2 to 4 times that of conventional loans.
Now that general guidelines have been established it is important to understand some of the varying information regarding the different types of transactions.
1. Purchase Transactions – When structuring these types of loans, the lender will scrutinize the purchase agreement and the appraisal for the property in question. The appraisal will be the basis for value and the purchase agreement will determine the market and subsequently create a foundation for the transaction.
The amount of the loan, as well as the LTV, will be decided by using the appraised value or the purchase price, whichever is lower. This follows the theory that price determines the true value. The price is usually an arms-length agreement between a buyer and seller. Lenders will use this as a general model barring of course situations where true value is significantly higher that agreed price. If this is the case then a lender would usually need proof from the borrower that there is actually additional equity available upon purchasing the property.
Another way that purchase loans differ from typical transactions is the borrower must set aside the down payment and fees into an escrow account.
2. Refinance Loans – In contrast to purchase loans, lenders are concerned primarily with the appraisal, existing liens and corresponding loan amount. Different than purchase transactions, refinance loans are typically written so that the fees are incorporated in to the loan amount. To clarify, the fees are added to any amount that the borrower needs to net after cash out and/or repayment of existing loans.
3. Development Loans – The construction loan or the development loan has three basic features. The LTV often is contingent upon the future value of the property. The funds are distributed according to a draw plan.
And lastly, an interest reserve account is usually set up so that money has been set aside upfront for the repayment of the loan during construction period. These three things make a construction loan or development loan different than most other hard money loans.
When seeking a hard money loan you will have to provide documentation that is typical for these type of loans and possibly more detailed documentation contingent upon your situation. The typical documentation would be bank statements, title policy, income documentation, appraisal, borrower’s credit report and the borrower’s application.
Detailed documentation can include a draw schedule, purchase agreement, construction breakdown and the executive summary. Depending upon how complex the loan is going to be, it can take anywhere from 7 to 14 days for a typical private money loan.
In the end, a San Diego hard money loan is the best way to get the money for a non-conventional undertaking in the least amount of time. Ideally this has given you a basic understanding about the workings of a hard money loan.
