Ten Common Questions about San Diego Hard Money

by Morgan A. Scott

1. What is a San Diego 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. What is the difference between a hard money loan and a bank loan?

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.

A borrowers income and credit history are still important considerations in creating a hard money loan. However, the most weight is given to the collateral, which is the equity in the underlying real estate.

The trust deed in an instrument used by the borrower to pledge their piece of property as collateral to the lender in case of default of repayment.

The primary difference between bank loans and hard money or private loans is that the lender requires a larger equity position as collateral in San Diego hard money loans.

3. Can you use hard money for loans on commercial and residential property?

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

The procedures of doing the loan are similar but the concepts regarding the value and equity vary significantly between commercial and residential property.

4. I have a bad credit history. Will I be able to qualify for a hard money loan in California?

In the majority of cases where borrowers have credit histories that are less than stellar, this fact alone will not prohibit the availability of private financing. Having said this, almost all private lenders will look at the reports of your credit history.

A hard money lender will want to look at your credit reports firstly because they want to calculate the amount of money you are currently spending servicing debt.

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.

Most often if the other parts of your profile are strong you may still be eligible for a loan.

5. Does the phrase, hard money loan, describe more than one financing scenario?

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. What will I need to give to my San Diego hard money lender if I want to apply for private money loan?

There are two sides to this question. This is due to the different documentation required by residential loans and commercial loans.

Documentation for a residence includes an application, at least two years of income statements, a credit report, an appraisal report, and current bank records.

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?

The interest rate will vary depending on the transaction. For example, the type of property will affect the interest rate, commercial vs. residential.

Normally, interest rates can be as little as 9% all the way up to 16%. Factors that can impact private money interest rates include term length, the borrowers credit risk, lien position of the lender, and the condition of the property.

8. What kinds of loan repayment schedules are available with hard money?

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

9. What type of loan term will I have?

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. Will I have a prepayment penalty?

Each investor is different and each investor's terms will vary from transaction to transaction. When applying for any loan it is a good idea to inquire about eliminating a pre-payment penalty from your loan terms.

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