Learn About Our Hard Money Loans in Sacramento, CA
WTR LOAN FUND is here to help you understand hard money loans in Sacramento, CA. To learn more, reach out to us today.
A hard money loan is simply a short-term loan secured by real estate. These loans are funded by private individuals (or a fund of investors) as opposed to conventional lenders such as banks or credit unions. The terms are usually around 6-24 months. The loan requires monthly payments of only interest unless borrower wants to pay additional principle with a balloon payment at the end of the term.
The amount the hard money lenders are able to lend to the borrower is primarily based on the value of the subject property. The property may be one the borrower already owns and wishes to use as collateral, or it may be the property the borrower is purchasing.
Hard money lenders are primarily concerned with the property’s equity or value rather than the borrower’s credit. Borrowers who cannot get conventional financing due to a recent foreclosure or short sale can still obtain a hard money loan if they have sufficient equity in the property that is being used as collateral. When a bank says no, a hard money lender may be an option for a yes.
Property Types for Hard Money Loans
A borrower can get a hard money loan on almost any type of real estate – including single-family residential, multi-family residential, commercial, land, and industrial.
Some hard money lenders may specialize in one specific property type such as residential and not be able to do land loans, simply because they have no experience in this area. Most hard money lenders have a specific niche of loan they are most comfortable with. Ask them upfront which type of loans they are willing and able to do.
Many hard money lenders choose not lend on owner-occupied residential properties due to the extra rules and regulations. All hard money lenders will do loans in 1st position, while fewer will do 2nd position due to the increased risk for the lender.
What Types of Deals Should Hard Money Loans Be Used For?
Hard money loans are not appropriate for all deals. When purchasing a primary residence with good credit, income history, and there are no issues such as a short sale or foreclosure, conventional financing through a bank is the best way to go if the borrower still has time to go through the lengthy approval process required by a bank. Hard money is your source of financing when banks are not an option, or the loan is needed in a short period of time.
Hard money loans are ideal for situations such as:
Fix and Flips
When the Buyer has Credit Issues
When a Real Estate Investor Needs to Act Quickly
Who uses Hard Money Loans?
Real estate investors choose to use hard money for many different reasons. The main reason is the ability of the hard money lender to fund the loan quickly. In most situations, hard money loans can be funded within a week. Compare that to the 30–45 days it takes to get a bank loan funded. The application process for a hard money loan is generally accomplished same day. Good luck hearing back about a loan approval from your bank within the same week!
The ability to obtain funding at a much faster rate than a bank loan is a significant advantage for a real estate investor. Especially when the real estate investor is trying to acquire a property with many competing bids, a quick close with a hard money loan will get a seller's attention and set their offer apart from the rest of the buyers offering slow conventional financing.
Another reason a borrower may choose to use a hard money loan is that they have been rejected by the banks for a conventional loan. Life doesn’t always go as planned. Short sales, foreclosures, credit issues… they happen. Another important thing banks need to see is income history. If a potential borrower recently started a new job, the bank may deny the loan request due to insufficient income history, even if the borrower makes a healthy income. Hard money lenders are able to look past these issues as long as the loan will be repaid and the borrower has enough equity invested in the property.
Interest Rates and Points for Hard Money Loans
The interest rates and points charged by hard money lenders will vary based on the risk of the deal. Hard money lenders take on more risk with their loans compared to a conventional bank loan. Due to this higher risk involved with a hard money loan, the interest rates for a hard money loan will be higher than conventional loans. Interest rates for hard money loans range from 10–15% depending on the specific scenario and the perceived risk of the loan. Points can range anywhere from 2–4% of the total amount loaned. The interest rates and points may vary greatly depending on the loan to value ratio.
Hard Money Loan to Value Ratios
The loan amount the hard money lender is able to lend is determined by the ratio of the loan amount divided by the value of the property. This is known as the loan to value (LTV). Many hard money lenders will lend up to 65–75% of the current value of the property.
There are some hard money lenders who will lend a high percentage of the ARV and will even finance the rehab costs. This may sound great from the borrower’s point of view, but these types of loans have a much higher risk involved, and the interest rate and points will be much higher. Expect 15–18% interest and 5–6 points when a lender funds a loan with little to no down payment from the borrower. In some cases, it may be worthwhile for the borrower to pay these exorbitant rates in order to secure the deal if they can still generate profit from the project.
Borrower Requirements for Hard Money Loans
As discussed earlier, hard money lenders are primarily concerned with the amount of equity the borrower has invested in the property that will be used as collateral. They are less concerned with the borrower’s credit rating. Issues on a borrower’s record such as a foreclosure or short sale can be overlooked if the borrower has the capital to pay the interest on the loan.
The hard money lender must also consider the borrower’s plan for the property. The borrower must present a reasonable plan that shows how they intend to pay off the loan. Usually, this is improving the property and selling it or obtaining long-term financing later on.