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How Does Private Money Work 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.
This article will discuss the general guidelines of San Diego hard money, specifics pertaining to purchase transactions, refinance loans, development/construction loans, and the general processing of a hard money loan.
When working with private money loans it is important to understand the general guidelines. Because private loans are based on equity lending, it is essential that the loan in question have a low loan to value(LTV) ratio.
The LTV is normally written at 65% or under. This means that the amount loaned when compared to the value must be under 65%. Also, the condition and value of the property is considered. A property that is in a less desirable traffic area may be considered by private lenders and investors as long as the LTV was very low in order to minimize perceived risk.
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.
To use as a guideline, the rates for a private money loan will vary from 9 to 15 percent mainly due to the risk of the loan, the type of property and the position of the lien. This type of loan normally has shorter terms than a typical loan, only averaging from 1 to 3 years. But the fees will be as much as 2 to 4 times the typical loan fees.
Now that typical guidelines for private money have been explained, some different types of transactions will be explored.
1. Purchase Transactions – In this transaction an investor and lender will examine the appraisal and the purchase agreement very closely. This will be a priority for the lender when setting up this type of loan. The purchase agreement will communicate the market and form the base for the transaction. Complimented by the purchase contract, the appraisal gives the lender a sense of worth about the property.
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 – The refinance loan differs from the purchase loan because the lender’s top concern is established value and respective loan amount. As a result, the lender will want to review the appraisal and any existing liens. Different that purchase transactions, fees are tied into the loan when dealing with a refinance transaction. The fees are added to the amount the borrower gets after paying off existing loans or obtaining cash out.
3. Development/Construction Loans – These types of loans have three distinct features. First, the LTV is often based off of a future value. Secondly, there is typically a draw schedule that mandates how funds are distributed.
And last but not least, an account called an interest reserve account is opened for the money to be deposited for repayment during construction. This is what makes a development loan different than other private money loans.
Documentation will be required depending upon the loan that is being sought. Usually what will be required is the standard docs, while more specific information may be required. The standard package may include the title policy, appraisal, income documentation, borrower’s application, bank statements and the borrower’s credit report.
More specific documentation might include; purchase agreement, executive summary, construction breakdown, and draw schedule. With most private money loans you are usually looking at 7-14 business days from lender receipt of the entire loan package. These times may vary depending on the complexity of the transaction.
In conclusion, hard money is a great way to fund non-conventional projects in a short period of time. Hopefully, you have a better idea of how San Diego hard money works.
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