Dec 09
9
California Private Money Loans – How They Work
The most often asked question when dealing with San Diego Hard Money is how does this work. Private money is another term used when referring to hard 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.
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.
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.
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 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 – 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 – In contrast to purchase loans, lenders are concerned primarily with the appraisal, existing liens and corresponding loan amount. Different than purchase transactions, refinance loans are typically written so that the fees are incorporated in to the loan amount. To clarify, the fees are added to any amount that the borrower needs to net after cash out and/or repayment of existing loans.
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 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.
Finally! The whole unbiased truth about San Diego Private Money exposed. You owe it to yourself to get the facts today by visiting San Diego Hard Money Lender and San Diego Private Money.
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