Explaining a Private Money Loan In San Diego
Posted by Morgan A. Scott | Filed under Finance
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.
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.
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.
As with any transaction, the fees,terms and rates will vary.
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.
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.
Another way that purchase 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 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 - This loan has three separate features. The LTV is usually contingent on the future value. The funds are distributed according to a draw schedule.
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.
When seeking a hard money loan you will have to provide documentation that is typical for these type of loans and possibly more detailed documentation contingent upon your situation. The typical documentation would be bank statements, title policy, income documentation, appraisal, borrower’s credit report and the borrower’s application.
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– days for a typical private money loan.
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.
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