The topic of hard money and how it works, is frequently a point of discussion when talking about private financing. First, hard money is frequently called private money.

In this article you will learn about a San Diego hard money loan and the different aspects it takes to complete one. Refinance loans, development loans, purchase transactions and processing of the loan will be explained.

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.

The LTV is normally written at 65% or under. This means that the amount loaned when compared to the value must be under 65%. Also, the condition and value of the property is considered. A property that is in a less desirable traffic area may be considered by private lenders and investors as long as the LTV was very low in order to minimize perceived risk.

Also, the person seeking the loan must have the ability and means to repay the loan. The stronger the collateral and the ability of the borrower to make payments will usually make a hard money loan worthwhile.

Rates, fees and terms will vary greatly depending on the transaction.

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 typical guidelines for private money have been explained, some different types of transactions will be explored.

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.

The amount of the loan, as well as the LTV, will be decided by using the appraised value or the purchase price, whichever is lower. This follows the theory that price determines the true value. The price is usually an arms-length agreement between a buyer and seller. Lenders will use this as a general model barring of course situations where true value is significantly higher that agreed price. If this is the case then a lender would usually need proof from the borrower that there is actually additional equity available upon purchasing the property.

The other aspect that differs with purchases is that the borrower must bring in to escrow the down payment and any fees charged. This is different because in refinances the fees are typically financed into the overall loan amount.

2. Refinance Loans – In contrast to purchase loans, lenders are concerned primarily with the appraisal, existing liens and corresponding loan amount. Different than purchase transactions, refinance loans are typically written so that the fees are incorporated in to the loan amount. To clarify, the fees are added to any amount that the borrower needs to net after cash out and/or repayment of existing loans.

3. Development/Construction Loans – These types of loans have three distinct features. First, the LTV is often based off of a future value. Secondly, there is typically a draw schedule that mandates how funds are distributed.

Lastly, money is put aside for the repayment while the construction is being done by setting up an interest reserve account at inception. These are the three ways a development loan differs from other types of hard money loans.

With all of these hard money loans, you will need some standard documentation, and possibly more specific documentation depending on the type of loan that you seek. Some standard documentation would include; appraisal, borrower’s application, borrower’s credit report, bank statements, income documentation, and a title policy.

If detailed information is required it may include a construction breakdown, draw schedule, purchase agreement and executive summary. The private money loan is usually drawn up in about 7 to 14 days after the lender receives the loan package. This time may be more or less depending on the transaction itself.

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.