Before committing to any type of private hard money lending in California as a real estate investor, it is essential to comprehend the various kinds offered and their associated risks. Taking this approach will ensure you are well-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. Moreover, it discusses 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 buyers and sellers to make investments without waiting 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 a hard money loan. Hard money loans have more relaxed credit requirements and can be obtained more quickly for investing compared to conventional loans. However, they come at a higher price in terms of rates and additional fees that may accompany the transaction.
Why Is called a Hard Money Loan?
They call it hard money because the lender risks potentially losing their investment if the borrower defaults.
Private hard money lending generally offers higher interest rates and shorter-term financing than traditional lenders. The value of the property, rather than the borrower’s creditworthiness, backs a hard money loan. They may offer hard money with higher loan-to-value (LTV) ratios and require less paperwork with 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 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 real estate investors finance the acquisition of investment property along with construction loans. You can use real estate loans for cash-out refinance purposes on non-owner occupied properties.
High Reward = High Risk.
So, the term refers to a loan borrowed with real estate used as collateral. For California real estate investors looking to purchase or invest in property using a hard money loan; private hard money lending 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. Due to risk, hard money loans 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-n-flip loan is a hard money loan that investors use to 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. In addition, some lenders will provide pre-funding for renovation costs at the closing of the loan.
Bridge Loans Explained
Bridge loans provide options for those looking for short-term financing but require understanding of the terms to minimize risks. Ultimately, it’s important real estate investors conduct proper due diligence and read all agreements carefully before making 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. Private hard money lending in California may offer bridge financing, providing quick capital against an existing asset until traditional options become available.
Property types
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
Private hard money lenders typically look at two primary factors when assessing potential borrowers; credit worthiness and collateral.
California Hard Money Loan Process
Loans typically begin with a real estate investor submitting a loan request for the 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. Lenders usually secure these types of loans with 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 assess the amount of debt associated with a specific property. In real estate investing, LTV is calculated by dividing the loan amount by the appraised value of the property and multiplying by 100. This percentage indicates how much of the property’s purchase price is financed through debt rather than cash.
For example, an LTV of 75% means that 75% of the purchase price is financed, while 25% is paid as a down payment. Generally, lenders prefer lower LTV ratios because they increase the likelihood of being repaid if the borrower defaults on the loan.
Lenders assess which assets the borrower owns that can be used as leverage against the requested loan amount when providing a hard money loan based on collateral. This may include real estate, land, equipment, or other assets, depending on the agreement established between the parties prior to signing any hard money lending contracts in California.
The difference: Experienced Hard Money Lender, Private Lenders, and Conventional lenders.
Private hard money lending in California involves 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. It’s important to note the terms “private money” and “hard money” have started being used interchangeably.
True private money refers to funds raised and borrowed directly from individuals seeking to earn higher interest than what a traditional savings account offers.
Institutional Lenders
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 Private Money Hard Money Loan
Borrowers should understand the risks of taking out a hard money loan, including higher interest rates than those offered by institutional lenders and additional fees like closing costs and origination fees. Depending on the payment plan established between both parties, late repayments can result in penalty charges, which may significantly increase the overall cost of an already expensive transaction. Therefore, it’s crucial for prospective borrowers to understand the terms and repayment obligations before committing to a hard money loan.
How to find the best California hard money lenders?
In today’s California real estate market, not all hard money lenders are created equal. Finding the best hard money lender in California can be a daunting task when you see so many loan programs. The best way to begin the search is by asking for referrals from friends, real estate agents, and online communities.
When researching lenders, it is important to look for reviews, compare rates and consider the time they’ve 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 private hard money lender working with both active and passive real estate investors. We offer flexible loan programs in a timely manner for all real estate investment properties. The process is simple – a loan request to same-day approval and 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. We provide borrowers with 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. Therefore, we underwrite our loans as a direct lender without having to shop your deal or for a bank’s approval.
Coverage of Area
As a California hard money lender, MOR Financial covers the entire state with most private hard money loans in Los Angeles, San Diego, Orange, Riverside, San Bernardino, Santa Clara, Alameda, Sacramento, Contra Costa, and Fresno.
We started in 2006 and are just as committed to help borrowers get the hard money they need to succeed!
We provide hard money loans to California real estate investors, offering competitive loan terms and peerless customer service. MOR Financial helps you close your loan quickly so that you can get back to investing in real estate.
