Hard Money Loans San Diego
If you’re reading this, it’s because you heard about hard money – and are probably interested in getting a hard money loan. No problem – we can help. But before you reach out to us, it’s important you understand what a hard money loan is, and whether or not it’s right for you. This type of lending isn’t meant for everyone. It’s geared towards real estate investors – who need funding because they can’t turn to traditional lenders. Hard money IS NOT for someone who wants to purchase a primary residence and then take 10-30 years to pay it back. Hard money is a financial vehicle that is given by independent lenders, and thus – has a totally different set of rules.
Conventional loans are mainly based on the borrower’s credit score in addition to other factors. Hard money loans are based on the value of the pledged asset. When you ask for a hard money loan – you are required to put up an asset that acts as a security for the loan. It’s common for the asset to be the property itself. Since the property serves as collateral, it protects the hard money lender whose giving the money. More importantly, it gets you funding that you otherwise wouldn’t be able to get. Traditional lenders will never give you a loan based on collateral. It’s not part of their guidelines.
Hard money loans are useful in situations where the borrower has limited choices. Because banks and traditional financial institutions follow a stringent process that includes checking credit scores, verifying income and employment, etc, most borrowers are unable to get qualified fast enough.
The terms of these loans are not as generous as the terms of a conventional loan. This is attributable to the risky nature of the loans. Borrowers typically pay more than what a traditional lender would charge. This trade-off occurs due to the risky nature of the loans. In order to approve a loan – traditional lenders focusing on the ability of the borrower to repay the loan. They look at the borrower’s income, his or her credit score, and obligations, among many other factors. The application process is slow and tedious because it involves a lot of details.
Hard money lenders, on the other hand, view the loans from a different angle. They are more concerned about the value of the collateral and are less interested in the borrower’s ability to repay the loan. If the borrower unable to repay a hard money loan, the lender can take possession of the property and sell it to get their money back. Hard money loans are also short term because of the high interest and the levels of risks involved.
The following are some of the advantages San Diego hard money borrowers enjoy
• Flexibility: Conventional loans are not flexible because they are guided by strict policies and procedures. Hard money lenders, on the other hand, are quite flexible because their loans depend on the terms the involved parties agree on. As a result – every single aspect of the transaction can be negotiated.
• Speed: Because hard money lenders aren’t as interested in the financial history of the borrower, you’re able to cut through tons of red tape. The lender is only interested in the value of the collateral, which means they spend time verifying the asset’s value and then give you their terms and conditions. This is advantageous to the borrower because he/she can get funding within a short time and get on with his/her project.
• Approval rate: The most important piece of the puzzle in a hard money deal is the collateral. The lender is interested in verifying the value of the asset and is less concerned about other things. If the collateral is genuine, a borrower is almost guaranteed of an approval.
Having looked at the advantages of hard money loans, it is also important to look at the drawbacks.
• Cost: This is the biggest drawback associated with hard money. The cost of the loan is usually higher than that incurred when one is applying for a conventional loan from a financial institution. The high cost comes in form of high-interest rates mainly due to the risky nature of the loan. The cost might also higher if the borrower ends up losing his or her property to the lender. If you fail to repay the loan the lender has the right to take possession of the property and sell it.
• It is a short-term loan: Because there are few assurances, lenders prefer to keep the agreement short so that they can minimize their exposure. Borrowers seeking long-term loans are usually turned down.
How do I get a hard money loan?
Many of your financial needs can be satisfied through traditional loan programs offered by institutional lenders, such as a local credit union, a national bank or another similar type of financial institution. These lenders typically have very stringent underwriting guidelines that give them no wiggle room to think outside the box. The reality, however, is that many loan requests do not fit inside their guidelines.
This is where hard money lenders come into the picture. Financial institutions are not the only option available when you are looking for financing. Private lenders and investors can also provide you with the money that you need. When working with a hard money lender – you can expect a greater level of creativity when creating potential loan offers. Because hard money lenders aren’t stuck with very specific guidelines, they have greater freedoms. However, because hard money loans tend to handle riskier projects, you can also expect a hard money loan to have a higher interest rate and a shorter loan term.
Research San Diego Hard Money Lenders
Many people who are thinking about applying for a hard money loan have already received at least one rejection from an institutional investor. This is a problem that results in some applicants turning to the first hard money lender that shows interest in their loan request. Remember that hard money loans are not regulated by the government. While some lenders are reputable, others are not. Look for a direct lender rather than an intermediary.
Review the company’s Better Business Bureau rating and read consumer reviews. While there is always a chance that one or two deals in the past went bad, numerous bad reviews should be a red flag.Be wary of a hard money lender whose phone always rolls to voicemail.
Prepare a Loan Request Package
After you find a few reputable San Diego hard money lenders, initially contact them by phone or email to discuss your project and to determine their level of interest. Some may be able to tell just by speaking with you that your loan request is not something that they will be able to help you with. Others may give you confidence to proceed with the next step. For hard money lenders that have expressed interest in learning more about your loan request, send them a detailed loan package.
A loan package will not have your bank statements, credit report, tax returns or other personal financial information in most cases. However, it will have a write-up or outline of your loan request. It will also highlight the current condition of the property, and what you intend on doing with the property. For example, if an issue is low occupancy because the property is in poor condition, your write-up should include information about how the loan funds will be used specifically to improve property condition. It should also include a current rent roll and projected numbers based on market level occupancy.
After you submit a loan request package to a few lenders, you will be able to better determine their interest. If they decide to proceed with your loan request, you will receive preliminary loan terms up-front as well as a list of documents that may be required to complete the loan application. Remember that a hard money loan timeline is usually expedited in comparison to a traditional financial institution loan timeline.
How long does a hard money loan take to close?
There are instances when loan applicants need to close quickly. For example, you may need to follow through on a 1031 exchange in order to avoid a huge tax bill, and your window for acting accordingly is rapidly closing. Perhaps have a balloon payment due on your mortgage and you waited a bit too long to start looking for a replacement loan. You may have a great opportunity available to you, but the seller may not be willing to wait a few months for a traditional loan to go through.
One of the factors that influences the timeline of your loan request’s approval and funding is the lender that you choose to work with. In most cases, you will enjoy a faster overall experience when you work with a direct lender or investor. Some companies position themselves to appear as a direct lender, but they actually function in a brokerage role by actively searching for a hard money investor interested in your project after you submit a full loan request. As you might imagine, the fact that a broker needs to search for an interested investor can add unnecessary time to the timeframe.
In addition, each lender has a different requirement regarding third party reports and market research. Some will accept an appraisal that was not prepared specifically for them, and this can save a substantial amount of time and money. Remember that most traditional financial institutions need an appraisal and other third-party reports prepared for them. The use of an existing appraisal may not be possible, or it may need to be updated. This takes time and costs additional money.
Regardless of the lender who you choose to work with, your closing date will typically be subject to the title company’s efforts. A clear title is generally a requirement regardless of the type of financing that you use. The fastest turnaround time that you could reasonably accept as a quote is five to seven days, and this may only be possible when you have a complete loan package ready to submit to the hard money lender.
Another factor that will affect the timeline for your closing relates to your specific loan request. Some hard money lenders want to physically visit the property before funding a loan. If you work with a local lender, there is usually not a delay for this. If your lender needs to make travel arrangements, this can add time to the process.
Hard money lenders generally also want to review your personal financial documents, corporate documents if you are applying under a partnership or another entity, and property-related documents. Specific loan requests may also generate the need for other documents that could take additional time for you to obtain and for the lender to review. For example, when you are applying for a loan on an apartment building that has been run into the ground because of poor management, you will need to identify a new management company to use. That management company will need to create a plan to turn the property around. Each loan request is unique. Because some loan requests are more specialized in different ways than others, additional reports or documentation that takes time to obtain may be required.
Regardless of the type of loan that you apply for, the general timeline is based on how fast the San Diego hard money lender can work as well as on how fast the borrower can provide documentation requested. In many cases, the lender’s side may be on hold until the borrower provides documentation. With this in mind, the borrower’s responsiveness is critical to the overall timeline regardless of the lender that you choose to work with.
As you can see, there are many factors that affect the overall San Diego hard money process. If your loan request is time-sensitive, it makes sense to ask about timing before committing to a lender. In addition, plan to be as responsive as possible to requests for documentation.