San Diego Hard Money Loans

If you move in real estate circles the chances are that you have encountered the term hard money. You might even be wondering what it is exactly. Hard money is also referred to as private money and it is used to describe loans that are provided by either private individuals or entities. When it comes to California real estate transactions these are the types of loans that are most often used.

The main difference between the usual types of loans and hard money is that the latter is usually based entirely upon the collateral of the property concerned. Because of this reason, you will discover that very often the loans are written way beneath what the property's value actually is. From the investor's point of view, they wish to make sure that there is sufficient equity available should there be a loss, or if the borrower defaults on their payments.

As mentioned above, hard money loans are usually provided by private investors. But they are also provided by private institutions and entities as well.

If you are undecided about whether private money is the solution for you then you will find the following information relevant. When deciding on this as your possible course of action you will need to consider a number of points. You should make sure that you have tried the usual sources first. These would include loans from either national or regional banks, as well as credit unions. In most instances these avenues will provide the borrower with the most competitive pricing and terms.

Sometimes, for various reasons, banks choose not to finance your transaction, in which case you could then look into whether you qualify for private money loans or not. Before you will be considered you will need to show that there is sufficient equity in the transaction, as well as your ability to repay the loan at two or three times the amount in interest and other fees.

This could well result in you wondering why anyone would opt for this course of action. However, it is important to bear in mind that often these are the types of loans that make the most sense. Some of those instances are listed below:

You require a Bridge loan.

You wish to purchase property and require an investor.

You need to rehabilitate an existing property for the purpose of selling.

You find that you are in short escrow and you need to buy without delay.

For financial reasons you need to access the equity in your property.

You need to extend your bridge loan.

You have approached the banks but they have refused you financing because you own many properties.

You have approached the banks but they have refused you finance because you have a unique property.

You are in a strong equity position and you are able to repay the loan but due to a negative credit record the banks have turned you down.

You require a temporary cash flow for your business.

As with most things in life you will find that choosing private money comes with its own advantages and disadvantages. Private money is invariable expensive and the terms are shorter than those of most banking institutions. But if you require both speed and flexibility then private money is definitely an option that you should consider. For many borrowers it is a useful means of obtaining finance when you are involved with California real estate.

Hard money is not hard at all! You will find that it is much quicker to obtain a loan that way than through the conventional means. The problems come in when one considers the fees and terms and conditions that are usually attached. Whereas it is not the best choice for some, for others it can be the answer that they have been looking for.

1. Just what is a hard money loan?

Hard money loans, a.k.a. private money, are a type of loan funded by a private entity. This could be an individual, partnership or institution.

The security for these loans is a considerable equity position in the real estate being financed. This means the L.T.V., or loan-to-value ratio is lower than a conventional loan.

2. Conventional loans vs. hard money loans, what is the distinction?

Conventional loans also know as bank loans are unwritten or evaluated by placing a significant emphasis on the borrower's income and the borrowers credit history.

A borrowers income and credit history are still important considerations in creating a hard money loan. However, the most weight is given to the collateral, which is the equity in the underlying real estate.

The equity in a piece of real estate is put forth as collateral using a document known as a Trust Deed. This is the most common instrument in San Diego, as well as most of California. Other instruments are available and they may vary depending on what part of the country you live in.

It is the size of this collateral, pledged by use of the Trust Deed, that forms the biggest distinction between conventional bank loans and private money financing. The private money lender will require that there will be substantially higher collateral than federally underwritten banks.

3. Are hard money loans available on commercial and residential real estate?

Yes! You can use hard money or private loans for residential homes or commercial property.

The procedures of doing the loan are similar but the concepts regarding the value and equity vary significantly between commercial and residential property.

4. I have a bad credit history. Will I be able to qualify for a hard money loan in California?

Usually, without question! However, remember question 2. In any case, a hard money lender will consider your credit history.

There are basically two reasons for this. First, they need to determine how much debt you are managing on a monthly basis.

Another reason a San Diego hard money lender will consider your credit history is to determine risk. This is similar to the purpose of a credit report review by a conventional lender. However, the private lender will give less overall weight to this consideration.

Assuming the other aspects of your full hard money loan package are desirable, most private money lenders will still fund.

5. Does the phrase, hard money loan, describe more than one financing scenario?

Yes! There are different loans for different borrowers needs. There are hard money loans for cashing out on residential properties, rehab SFR loans, commercial loans, commercial rehab, construction, land and various private money loans for acquisition.

6. If I need a hard money loan in San Diego, CA, what information will the lender ask for?

The information required to underwrite a private money loan will vary depending on whether the property is question is residential real estate or commercial real estate.

Documentation for a residence includes an application, at least two years of income statements, a credit report, an appraisal report, and current bank records.

Commercial: Application, Executive Summary, Pro Forma, Appraisal, Principals Financials, 2 Years Proof of Income.

7. At what interest rate can I expect to borrow hard money in San Diego?

The interest rate will vary depending on the transaction. For example, the type of property will affect the interest rate, commercial vs. residential.

Interest rates in the range from 10% to 15% are not uncommon. The interest rate a particular private lender charges will depend on the repayment terms of the loan, credit history, whether the loan will be senior or junior, and the condition of the improvements.

8. What type of loan can I request?

In general, fully amortized loans and interest only balloon loans are the most common hard money loans.

9. How long will the term of a hard money loan be?

The loan term will typically depend on the investor or funding entity. Generally speaking, the loan terms for private and hard money are short in duration. Anywhere from 1-5 years.

10. Do San Diego hard money investors charge penalties for pre-payment?

This is an issue that is up for negotiation. It will not hurt to ask for terms that do not include a prepayment penalty. Each lender will consider this request in light of the overall strength of your loan package.