The most often questioned question when dealing with San Diego Hard Money is how does this work. Private money is another term used when referring to hard money.
Below you will find a discussion about the policies of San Diego hard money, and the details of obtaining construction loans, buy transactions, refinance loans and the overall procedures pertaining to a hard money loan.
When working with private money loans it is vital to know 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.
Most of these loans are written for 65% LTV or lower, which means the loan amount must be 65% or less of the total value of the property. The property is going to have to be marketable. Some private lenders and investors will consider a property that has a low enough LTV even if it is in an area that is not as marketable if the risk is low enough.
Furthermore, the borrower who is taking the loan must be able to show the capacity and wherewithal to repay. Typically strong collateral, and a borrower’s ability to repay will justify making a hard money loan.
The type of transaction will govern the terms,as a result fees and rates will vary from transaction to transaction.
For some general insight, rates will vary anywhere from 9-15% depending on lien position, property type and overall risk of the transaction. The terms written are typically much shorter than conventional loans with terms ranging from 1-3 years on average. Fees will typically be anywhere from 2 to 4 times that of conventional loans.
Now that general guidelines have been established it is vital to know some of the varying information regarding the different types of transactions.
1. Buy Transactions – In this transaction an investor and lender will examine the appraisal and the buy agreement very closely. This will be a priority for the lender when setting up this type of loan. The buy agreement will communicate the market and form the base for the transaction. Complimented by the buy contract, the appraisal gives the lender a sense of worth about the property.
Using the appraisal or the buy price, the lower of the two will be the basis for the LTV and the loan amount. Right value is normally the result of the price. Where a buy is concerned, the price is the agreement reached by the buyer and the seller. Most lenders will evaluate buys in this regard. In certain cases, equity consideration may be given for a discount in price as long as the borrower can prove an extreme discount has been made.
Another way that buy 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 buy 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 buy 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.
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; buy 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 fantastic way to fund non-conventional projects in a small period of time. Hopefully, you have a better thought of how San Diego hard money works.