Before committing to any type of private hard money loan in California as a real estate investor, it is essential to comprehend the various kinds offered and their associated risks. Doing so will guarantee you are prepared for success!
If you’re considering taking out a hard money loan, this article will be an invaluable resource. It covers the essential details of hard money loans, the types of lenders available and their differences, what California-based direct hard money lenders offer as well as criteria for loan approval and potential risks associated with such financing options.
California Market Brief History
The California real estate market has a long and varied history of appreciation. According to the California Association of Realtors, since 1988 home prices in the state have appreciated by an average of 6.5% annually due to strong population and job growth. This year-over-year increase has made it easier for both buyers and sellers to make profitable investments without waiting too long for a return. It also makes the California real estate market safer for hard money lending.
In addition, some areas like the Bay Area have seen dramatic gains in real estate value over the past decade, with San Francisco home values increasing nearly 50% from 2010 to 2020. As such, California continues to be an attractive place for real estate investors looking for financial returns or those relocating to one of its many desirable locations.
So Let’s start with the basics of a Hard Money Loan.
What is Asset-based lending?
It is a private mortgage loan or also known as a hard money loan, unlike a conventional loan. Hard money loans require less stringent credit requirements and can be obtained faster for real estate investing; however, they come at a higher price in terms of higher rates and additional fees that may accompany the transaction such as origination fees or closing costs.
So, Why Is called a Hard Money Loan then?
It’s called hard money because it involves taking a risk on the part of the lender, who could potentially lose their investment if the borrower defaults on their loan.
Since hard money lenders generally offer higher interest rates and shorter-term financing than traditional lenders. The hard money loan is backed by the value of the property rather than a borrower’s creditworthiness. They also may offer private hard money loans with higher loan-to-value (LTV) ratios and require less paperwork as well as no minimum credit score requirements. Additionally, private money lenders have more flexibility in underwriting criteria and can often fund loans more quickly than traditional lenders.
Types of Investments Financed By California Hard Money Lenders
California Hard money loans are a valuable resource for real estate investors, particularly when it comes to financing California investment properties. Hard money lenders provide funding for a wide range of real estate projects from single-family and multi-family properties to commercial real estate, investment properties, and raw land.
In addition, many hard money mortgage lenders specialize in helping many real estate investors finance the acquisition of investment property along with construction loans. Real estate loans can be used for cash-out refinance purposes on non-owner occupied property.
High Reward = High Risk.
So, it is the term used for the loan when you borrow money secured by real estate as collateral. For California real estate investors looking to purchase or invest in property using a hard money loan; hard money lenders can provide a viable option for a higher ROI using the power of leverage and for better cash flow.
Loan terms are usually 6 months and up to 5 years
Hard money loans are short-term, business-purpose loans that allow borrowers to access quick capital with fewer credit requirements than conventional loans for quicker real estate transactions closing. Due to risk, these hard money loans are intended as bridge financing until more traditional loans from a conventional lender become available. The most common types of hard money loans are residential and commercial ones.
Residential hard money Loan Scenario
Residential loans are typically used for property renovations and repairs. For example, A fix and flip loan is a type of hard money loan that investors use to quickly purchase, renovate and resell a property.
Fix N Flip Loans
These loans allow investors to act quickly on opportunities, often without having to use their own capital. Fix and flips typically involve short-term, interest-only financing. Borrowers have the option of selecting a balloon payment option or paying off the loan with profits from the sale of the property. In addition, some lenders will provide pre-funding for renovation costs at the closing of the loan.
Bridge Loans Explained
Bridge loans provide an option for those looking for short-term financing but require careful analysis and understanding of the terms to minimize risks. Ultimately, it is important that real estate investors conduct proper due diligence and read all agreements carefully before making any commitments related to a hard money loan in California.
Commercial Hard Money Loan Scenario
While commercial loans fund business ventures such as large Real Estate acquisitions or constructing new buildings. Hard money lenders in California may also offer bridge financing which provides quick capital against an existing asset until more traditional options become available.
Commercial properties include office buildings, industrial sites, retail stores, apartment complexes, hotels and motels, restaurants, warehouses and storage units, self-storage facilities, medical centers, assisted living facilities, and daycare centers.
The Loan Process – Underwriting Criteria
Hard money lenders typically look at two primary factors when assessing potential borrowers; credit worthiness and collateral.
California Hard Money Loan Process
Hard money loans typically begin with a real estate investor submitting a loan request or loan scenario for the real estate purchase based on the purchase price. Obtaining a loan from a private lender or hard money lender based on the amount of equity in their asset. These types of loans are usually secured by the asset itself as collateral, such as an investment property.
Creditworthiness – Good, poor, or Low credit score
This includes the borrower’s credit score of applicants as well as their income level; companies providing these types of services typically can arrange loans with good or bad credit scores than those required by traditional banks in order to qualify for a loan agreement—it is, therefore, important to know your own credit score prior to applying for this type of loan agreement so you understand if you qualify or not ahead of time.
Collateral & Loan to Value
Loan-to-value (LTV) is a metric used to measure the amount of debt associated with a particular property. In real estate investing, LTV is determined by dividing the loan amount by the appraised value of a property and multiplying it by 100. The resulting number is an indication of how much of the purchase price was financed through debt rather than cash.
For example, an LTV of 75% means that 75% of the purchase price was financed and 25% was paid as a down payment. Generally, lenders prefer lower ratios as they increase their chances of getting repaid if the borrower defaults on the loan.
A hard money loan based on the collateral assesses what assets the borrower owns that could be leveraged against the loan amount requested; this could include Real Estate, land, equipment, or other assets owned by the borrower depending on what arrangement has been established between each party involved prior to signing any agreements relating to hard money lending arrangements in California.
The difference: Experienced Hard Money Lender, Private Lenders, and Conventional lenders.
Private money lenders in California are individuals or entities that provide short-term loans for real estate investments. Individuals can act as direct lenders, this may be a close friend or family member, real estate investors, individual professional private money lenders or hard money lenders, or other private financial institutions that provide hard money loans without typically using a mortgage broker. So it is important to know that the term private and hard money is starting to be used as one and the same just recently.
True private money is money raised and borrowed directly from individuals that are looking to earn extra interest than a traditional savings account.
Typically require a significant down payment, a lengthy loan application, and good credit scores to offer loans up to 80% loan-to-value (LTV) ratios at competitive rates. While typical terms range from 5-30 years, some conventional lenders offer shorter-term loans as adjustable-rate mortgages. Conventional lenders can be banks, credit unions, private mortgage companies, and more.
Risks Of Taking Out A California Hard Money Loan
Borrowers should consider there are certain risks associated with taking out a hard money loan including higher interest rates than those offered through institutional lenders along with additional fees associated with closing costs, origination fees, etc., depending on what payment plan has been established between both parties—if repayment is not made on time then penalty charges may also be applied which can add significant cost onto an already expensive transaction so it is essential that prospective borrowers understand exactly what repayments entails.
How to find the best California hard money lenders?
Not all hard money lenders are created equal, especially in today’s California real estate market. Finding the best hard money lender in California in 2023 can be a daunting task when you see so many loan programs marketed differently. The best way to begin the search is to start by asking for referrals from trusted sources including friends, family, real estate agents, and online communities.
When researching lenders, it is important to look for reviews, compare rates and fees and consider the duration of time they have been in business. Most loan programs will pencil out to be the same so it comes down to service and closing on time. So the main key question to ask is: Are you a direct hard money lender funding with your own funds?
Additionally, prospective borrowers should inquire about loan terms such as repayment schedules, pre-payment penalties, and credit requirements. Doing so will ensure that borrowers get the best deal possible when looking for hard money loans funded in California.
What makes MOR different?
MOR Financial is a direct hard money lender working with both active and passive real estate investors offering flexible loan programs in a timely manner for all real estate investment properties. The process is simple with a quick loan request to same-day approval and a shorter loan application to get your loan process going.
Property Types and Loan Programs
MOR Financial offers hard money lending for commercial properties, including office buildings, retail stores, warehouses, and industrial spaces as well as residential properties such as multifamily properties, single-family homes, and condos. We also offer loans for land acquisition, development, and construction projects. We can also fund ground-up construction for single-family projects.
MOR Financial stands out from other hard money lenders as borrowers get full customized solution options to help them meet their investment goals for their real estate projects, including alternative loan structures, rehab pre-funding options, short-term bridge loans, loans with poor credit, trustee sale refinances, trust loans and much more.
We raise capital and manage our own funds. This means we can underwrite and service our loans in-house as a direct money lender making our own decisions without having to shop your deal or wait for a bank line to give approval.
Coverage of Area
As a California hard money lender, MOR Financial covers the entire state with most hard money loans in Los Angeles, San Diego, Orange, Riverside, San Bernardino, Santa Clara, Alameda, Sacramento, Contra Costa, and Fresno.
We started in 2006, as just mortgage brokers and became a premier hard money lender in California, we are committed to helping borrowers get the California hard money financing they need to succeed!
We are dedicated to providing hard money loans for California real estate investors with the highest level of customer service and competitive hard money loan terms. MOR Financial strives to help you close your loan quickly and efficiently so that you can get back to investing in real estate.