Private Money Loans - How They Work In San Diego | Mortgage

Private Money Loans - How They Work In San Diego

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.

by MorganA.Scott

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.

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.

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.

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.

As with any transaction, the fees,terms and rates will vary.

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 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 - 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/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.

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.

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 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.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

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