Buy A Foreclosure Home

1. What is a hard money loan?

Hard money loans, a.k.a. private money, are a type of loan funded by a private entity. This could be an individual, partnership or institution.

They are typically secured by a strong equity position in the underlying piece of real estate used as collateral. They are usually written with a low loan-to-value (LTV).

2. Conventional loans vs. hard money loans, what is the distinction?

Conventional loans also know as bank loans are unwritten or evaluated by placing a significant emphasis on the borrower’s income and the borrowers credit history.

The most weight, in a hard money or private money loan scenario, is assigned to the value of the equity available in the property being consideration for financing. This is not to say that credit history and income documentation are not considered in a hard money loan application. Nothing could be further from the truth. The issue is simply the overall weight give to different criteria.

The equity in a piece of real estate is put forth as collateral using a document known as a Trust Deed. This is the most common instrument in San Diego, as well as most of California. Other instruments are available and they may vary depending on what part of the country you live in.

It is the size of this collateral, pledged by use of the Trust Deed, that forms the biggest distinction between conventional bank loans and private money financing. The private money lender will require that there will be substantially higher collateral than federally underwritten banks.

3. Are commercial properties and residential properties both eligible for hard money loans?

Absolutely! Hard money can be used for any type real estate: single family homes, land, apartments, industrial buildings, office buildings, and retail stores.

The steps taken to make a loan on commercial or residential real estate are similar. The concepts of value and equity between the two are significantly different.

4. My credit is marginal. Is hard/private money financing available to people like me?

Usually, without question! However, remember question 2. In any case, a hard money lender will consider your credit history.

There are basically two reasons for this. First, they need to determine how much debt you are managing on a monthly basis.

Another reason a San Diego hard money lender will consider your credit history is to determine risk. This is similar to the purpose of a credit report review by a conventional lender. However, the private lender will give less overall weight to this consideration.

Usually, your qualification for a loan will hold if the collateral and income portions of your package are within guidelines.

5. Is there more than one kind of hard money loan?

Yes! There are different loans for different borrowers needs. There are hard money loans for cashing out on residential properties, rehab SFR loans, commercial loans, commercial rehab, construction, land and various private money loans for acquisition.

6. If I need a hard money loan in San Diego, CA, what information will the lender ask for?

The information required to underwrite a private money loan will vary depending on whether the property is question is residential real estate or commercial real estate.

A hard money lender underwriting residential real estate will usually ask for 1-2 years tax records, the last two month bank statements, a current appraisal, a completed application, and a three bureau credit report.

Documentation for a commercial property includes an application, an executive summary, a pro forma, an appraisal, each principals financial statements, and at least two years of income statements.

7. At what interest rate can I expect to borrow hard money in San Diego?

There really is no set answer for this question. The interest rate will differ from deal to deal. To illustrate this, commercial rates are often different from residential rates from the same lender.

The interest rate will also vary depending on the following; lien position, term, credit worthiness of the borrower and property condition. Generally speaking the interest rate could range anywhere from 9-16%.

8. Are all hard money loans balloon loans?

In general, fully amortized loans and interest only balloon loans are the most common hard money loans.

9. How long will I have to repay my private financed loan?

The length of loan terms for private money loans are normally not as long as conventional loans. Every hard money lender will be different. Typical San Diego hard money loans are made from anywhere from one to five years.

10. Are prepayment penalties common in private money loans?

This is an issue that is up for negotiation. It will not hurt to ask for terms that do not include a prepayment penalty. Each lender will consider this request in light of the overall strength of your loan package.