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.
Below you will find a discussion about the policies of San Diego hard money, and the details of obtaining construction loans, purchase transactions, refinance loans and the overall procedures pertaining to a hard money loan.
Typical ideas associated with a private money loan must be explained. The private loan must have a low LTV (loan to value) ratio. This is due to the basis of the loan being weighed upon the equity available for the property being promised as collateral.
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.
The type of transaction will govern the terms,as a result fees and rates will vary from transaction to transaction.
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.
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 Loans – The construction loan or the development loan has three basic features. The LTV often is contingent upon the future value of the property. The funds are distributed according to a draw plan.
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.
When seeking a hard money loan you will have to provide documentation that is typical for these type of loans and possibly more detailed documentation contingent upon your situation. The typical documentation would be bank statements, title policy, income documentation, appraisal, borrower’s credit report and the borrower’s application.
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.
To get all the latest tips, tricks, and tactics about using San Diego Private Money, be sure to visit us at Scottway Capital San Diego Hard Money or at San Diego Private Money.
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