Private 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.
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.
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.
Rates, fees and terms will vary greatly depending on the 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 - 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.
It is important to note that the loan amount and LTV will be based off of the purchase price or appraised value, whichever is LOWER. This is because of the reasoning that the true value is determined by price. In case of a purchase, ultimately, price is whatever the buyer and seller agree upon. Most lenders will assume this concept unless there is an extreme discount that can be shown and proven by the borrower.
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.
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 14 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.
