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.
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.
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.
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 – The purchase transaction loan will require the lender to check the purchase agreement very closely. This will go for the appraisal as well. The appraisal is the way the value is determined. The purchase agreement is the determination for the market and the foundation of 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.
The other aspect that differs with purchases is that the borrower must bring in to escrow the down payment and any fees charged. This is different because in refinances the fees are typically financed into the overall loan amount.
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.
Lastly, money is put aside for the repayment while the construction is being done by setting up an interest reserve account at inception. These are the three ways a development loan differs from other types of hard money loans.
With all of these hard money loans, you will need some standard documentation, and possibly more specific documentation depending on the type of loan that you seek. Some standard documentation would include; appraisal, borrower’s application, borrower’s credit report, bank statements, income documentation, and a title policy.
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 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.
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