Hard money loans are a financing option for individuals that are unable to secure traditional financing through a bank. These loans are short-term loans commonly referred to as bridge loans that are funded quickly to obtain real estate property.
The source of financing for hard money loans is provided by private investors rather than banks and credit unions. They don’t use the same approval criteria that are used by banks, however, the interest rates are often higher and the term of the loan is between 1-5 years.
How it Works
Hard money loans are used to obtain property and/or land and are based on the value of the property. The loan is secured by the property and the amount of equity(down payment) that the borrower has in the property.
If a borrower defaults on repaying the loan, the lender will turn around and repossess the property and sell it. The funds from the sale are used to pay back the loan.
Most California hard money lenders will provide loans between 65% to 75% LTV(loan-to-value). In some cases, there are lenders that will offer as high as 85% LTV loan amounts.
Loans are not based on the borrower’s credit or income history. People with bad credit, no credit, low credit scores, or lack of income documentation typically have a hard time obtaining financing through a traditional bank. A hard money loan is based on the amount of equity a borrower has invested and their ability to repay the loan.
Why Obtain a Hard Money Loan
There are many reasons why a hard money loan is obtained. The most common reason include the following:
- Real estate investors wanting to fix up a property and flip it.
- A borrower is rejected by banks
- Funding is needed in a short period of time to secure a property
California hard money lenders have guidelines that they must follow to provide a loan based on the Dodd-Frank Wall Street Reform and Protection Act of 2010. Borrowers are required to develop a plan on how the funds will be repaid. This can include long-term financing at a later date or selling the property after making necessary repairs and improvements.
When banks are turning you away there are other options available to you. If you are interested in securing a hard money loan, you should contact a lender to discuss the process of a hard money loan application.