Most home buyers are familiar with traditional mortgages as sources of borrowed money for the purchase of a home. There are, however, other sources of money for those who need a quick way to bridge a financial gap that may occur when purchasing a new home. This is particularly true for the purchase of homes that require immediate renovations or repairs. In these cases, traditional mortgage lenders, such as banks or credit unions, will typically refuse to lend money for the purpose of renovations. If repairs or improvements require amounts that equal a significant portion of the selling price of the home, such transactions will often call for a hard money loan.
What is a California hard money loan?
A hard money loan is a short-term loan, usually with higher interest rates, that is designed to allow the borrower to quickly and easily get the cash in hand that they need to meet their short-term goals. It is a form of secured debt, meaning that an asset, usually a home, will be used as collateral. In the event the loan is not repaid according to the terms, the lender will have the right to take possession of the home and sell it at auction to recoup the principal amount of the loan as well as fees and interest.
hard money loans can be a great source of funds for those who are interested in securing cash quickly that will be used for purposes not normally covered by traditional mortgages. Real estate investors who are primarily involved in fixing and flipping properties are some of the largest users of hard money loans. But other types of buyers may benefit from these loans as well.
In fact, hard money loans can be used by any property owner as a source of quick funds in the case of emergencies or unexpected costs. It is crucial, however, that the loan can be paid back quickly as the rates for hard money loans are often significantly higher than those for more traditional loan types.
What are the benefits of California hard money loans?
Hard money loans have a number of benefits that make them attractive to certain borrowers. These include the ability to access large amounts of money with poor or no credit, the ability to get cash in hand incredibly fast, sometimes on the same day, and being able to raise capital for projects that mortgage lenders would typically shy away from, such as repairs or improvements on a home.
Your credit usually doesn’t matter
Although some hard money lenders may still want to know that you have sufficient assets and no history of failing to pay back large loans, many will not even consider your credit rating or history. A hard money loan will be based completely on the value of the underlying collateral. This means that the amount that you will be eligible to receive will be some fraction of the assessed value of the home being used for collateral. This number will usually be around 50 percent of the home’s estimated value.
A California hard money loan can get you fast cash
Real estate investors and others who need hassle-free cash in larger amounts than other short-term loan types usually provide love the ability of hard money lenders to get them cash in hand without delay. Traditional mortgage lenders pour over all of the borrower’s personal finances, looking for anything that may indicate a high risk of default on the loan. If the lender finds something they don’t like, the application process can be delayed for weeks or months.
With a hard money loan, many borrowers are able to get the cash they need transferred to their account on the same day.
California Hard money loans are flexible
Hard money loans can be used for almost any purpose that the borrower deems necessary. Unlike traditional mortgages, hard money loans can be used for making repairs to a home, renovating it for later resale at a higher price or even to cover the costs of a short-term emergency. There are often literally no restrictions on how a hard money loan can be used.
Drawbacks of California hard money loans
Hard money loans also have a number of drawbacks. The first is that they cost more than traditional mortgages and other forms of secured loans. A typical interest rate on a hard loan will typically be in the double-digits and, in some cases, may exceed 20 percent.
Another negative with hard money is that the loan-to-value ratios are often lower than with traditional loans. This increases the risk to the borrower because any failure to pay back the loan on schedule could result in the lender taking possession. This means that a $100,000 home could be effectively lost over a $50,000 debt.
For certain home buyers and those needing large sums of short-term cash, the responsible use of hard money loans can provide a great alternative to traditional financing.
The Pros and Cons of California Hard Money Loans
A non-traditional way to obtain funds is through a hard money loan. This type of loan is provided by investors who offer lending based on property collateral. When a person is unable to obtain a loan through traditional means, the hard money approach may be the only option. The following explains how this type of loan works.
What is a California Hard Money Loan?
The majority of loans are created based on repayment ability. This is dependent on a person’s income and credit score. If the individual has has a good track record of borrowing money and paying it back, that person will likely get the loan they need. Traditional lenders can be very slow to approve loans, even if the applicant has an excellent income and solid credit rating. An individual with a negative credit history or an unverifiable income may never get a loan approval.
A California hard money lender offers a loan based on the collateral a person provides, such as a home or land. This loan is typically easier to get because it is not based on the ability to repay it. If the borrower cannot pay the money back, the lender simply takes the collateral and sells it to recover their funds. The collateral has a higher value than the borrower’s credit rating or income. Since the interest rate for a hard money loan is much higher than a traditional loan, it is practical for only a short period of time, averaging between one to five years.
Why Get a California Hard Money Loan?
With a higher interest rate, a hard money loan may not seem like a good choice. For those who cannot qualify for a traditional loan, it does offer the following benefits:
• Fast money. A California hard money loan closes more quickly because the lender is not concerned with a borrower’s financial status, only the collateral provided. Lenders also do not need to invest time in looking at bank statements or verifying a borrower’s income. Once the relationship has been established, the loan process can proceed smoothly, and the borrower will get their money right away.
• Flexibility. Since each hard money loan is evaluated individually, the approach offers more flexibility than the traditional loan process. Depending on the borrower’s circumstances, repayment schedules can be adjusted to better suit both parties. This is because there is a direct relationship between lender and borrower, rather than borrower and a company with strict rules.
• Approval. The main concern for hard money lenders is collateral. Most are not concerned with a borrower’s credit history, although some may ask general financial questions during the approval process. Lenders like a low loan-to-value ratio because this will allow them to quickly sell a property if the borrower defaults.
When Does it Make Sense to Use Hard Money?
Hard money is best suited as a short-term loan. This type of financing is often used by those who buy and “flip” houses. It makes sense because the borrower only occupies the property long enough to increase its value. If the person wants to stay there indefinitely, it is better to refinance.
Drawbacks of Using Hard Money
While California hard money loans are generally easy to get, they are not a perfect solution. They are costly, and the plan has to work smoothly for all parties to profit. In addition, lenders may value collateral property at a lower value than the borrower prefers. Borrowers should also consider other types of financing, which may help them come out ahead in the long term. A person may qualify for an FHA loan even without a perfect credit history. Interest rates for hard money loans can run into double digits, and the borrower may be forced to pay an origination fee to close the loan.
How to Find California Hard Money Lenders
Those who need to borrow money and want to obtain a hard money loan can reach out to local real estate investor groups and agents for the names of lenders who operate based on collateral. Talking with a few different California hard money lenders and building strong relationships is the road to getting funds quickly when they are needed.