Hard Money Loans – How They Work
This question is often asked more than any other when talking about San Diego Hard Money. To start, hard money is also commonly called private money.
In this article you will learn about a San Diego hard money loan and the different aspects it takes to complete one. Refinance loans, development loans, purchase transactions and processing of the loan will be explained.
If you will be working with hard money loans it is a good idea that you learn how they work. They are based in part on the value of the property. Therefore the loan to value (LTV) must be low.
Typically loans are written at 65% LTV and under. This would require that the loan amount, in comparison to the value, be under 65%. In addition, the property must be in marketable condition. Investors and private lenders may consider a property in a less marketable area as long as the LTV was low enough to offset the risk of lending the money.
In addition, the ability of the borrower to repay the loan must be shown. These loans are justified by the borrower’s capacity for repaying the loan and the presence of strong collateral.
Rates, fees and terms will vary greatly depending on the transaction.
As a general rule, the rates are usually anywhere from 9 to 15% according to the risk of the loan, the type of property being used for collateral and the lien position. Unlike a bank loan, the terms for this type average from 1 to 3 years. However, the fees are double or even four times the fees charged for a typical loan.
Now that the guidelines as they typically occur have been discussed, here is some information that may help explain the use of hard money loans in various 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/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 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.
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.
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– days for a typical private money loan.
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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