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San Diego Hard Money Top 10 FAQ’s
1. What is a hard money loan?
A hard money loan, also known as private money, is a loan that is funded by a private individual, entity, 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. How does it differ from a conventional/bank loan?
The primary criteria for approving a loan with conventional terms, like the ones banks make, is on the borrower’s documentation of their income and the overall health of their history as reported by the big three credit bureaus.
The most weight, in a hard money or private money loan scenario, is assigned to the value of the equity available in the property being consideration for financing. This is not to say that credit history and income documentation are not considered in a hard money loan application. Nothing could be further from the truth. The issue is simply the overall weight give to different criteria.
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.
The biggest distinction between conventional loans and hard money loans is the equity position required as collateral by the lender. In hard/private money loans equity position of the borrower may be as high as 15-40%.
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 steps taken to make a loan on commercial or residential real estate are similar. The concepts of value and equity between the two are significantly different.
4. My credit is marginal. Is hard/private money financing available to people like me?
In the majority of cases where borrowers have credit histories that are less than stellar, this fact alone will not prohibit the availability of private financing. Having said this, almost all private lenders will look at the reports of your credit history.
Here are the two reasons why even a private money lender will look at your credit score. Firstly, they want to know your monthly debt load.
Secondly, they will assess your overall risk by judging the relative strength of your credit historically.
Usually, your qualification for a loan will hold if the collateral and income portions of your package are within guidelines.
5. Hard Money Loans: Are there a variety of different types of loans?
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 wanted to get a hard money loan in California what would I need to provide?
There are two sides to this question. This is due to the different documentation required by residential loans and commercial loans.
A hard money lender underwriting residential real estate will usually ask for 1-2 years tax records, the last two month bank statements, a current appraisal, a completed application, and a three bureau credit report.
The hard money lender underwriting a commercial real estate project will typically ask for a financial proforma, a narrative commercial appraisal, two years proof of income, an executive summary, financial statements from the principals (individuals, partnerships, and/or corporations), and a completed application.
7. At what interest rate can I expect to borrow hard money in San Diego?
There really is no set answer for this question. The interest rate will differ from deal to deal. To illustrate this, commercial rates are often different from residential rates from the same lender.
The interest rate will also vary depending on the following; lien position, term, credit worthiness of the borrower and property condition. Generally speaking the interest rate could range anywhere from 9-16%.
8. Are all hard money loans balloon loans?
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?
Loan terms from 1 to 5 years are not uncommon. Since the interest rates of hard money loans are higher than conventional loans, the length of the loans is typically shorter than conventional loans.
10. Do San Diego hard money investors charge penalties for pre-payment?
Again this will depend on the funding entity, but you usually can request loan terms without prepayment penalties.
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