In the past, people associated hard money loans with shady lending characterized by very high-interest rates. This assumption was mainly due to some lenders who issued risky loans to property owners to foreclose on the properties. However, predatory private moneylenders rarely exist in the current market. Many people have embraced the concept of hard money refinance loans. At the Money Lender Loans in Orange County, we make it easy to acquire hard money refinance loans against existing property. It is important to understand the concept of hard money loans, including who should apply for hard money loans. It is also important to understand the process of applying for a hard money loan, including how to choose the best lender.
Overview of Hard Money Refinance Loans
Hard money refinance loans refer to easy to acquire, short-term loans offered by non-conventional lenders as opposed to traditional lenders such as credit unions or banks. The loan amounts offered will depend on the value of the collateral provided by the borrower rather than the creditworthiness of the borrower.
Unlike a traditional lender, a hard money lender pays more attention to the collateral asset than the person borrowing against the asset. Therefore, if you have a poor credit history, you may obtain a hard money loan as you rebuild your credit history to qualify for other loan options. If you are a homeowner almost facing a foreclosure, a hard money loan can help you secure some funds to pay off the foreclosing lender.
Hard money refinance loans are often a little more expensive than conventional loans. However, the increased cost is worth it as borrowers get faster access to capital, and the loan approval process is less stringent. Borrowers also enjoy flexibility in the hard money repayment.
You can borrow hard money refinance loans against many types of properties. The qualifying properties include single or multi-family residential homes, commercial properties, private land, or industrial properties, among others.
Different money lenders may concentrate on different property types depending on the lenders' policies. For example, some lenders may not offer hard loans against owner-occupied residential property as this comes with some additional rules and regulations. On the other hand, some lenders may be willing to navigate through the additional rules and regulations and offer hard loans against residential properties occupied by the owners.
Who Should Apply for Hard Money Loans?
As much as hard money loans are easy to acquire, they may not be a suitable option for all borrowers. For instance, if you are buying a primary residence, and you have no financial or credit history issues, conventional financing may be the way to go. Conventional financing is particularly ideal if there are no issues like foreclosure or short sales.
Hard money loans are an ideal option if you need a short-term loan and in cases where you do not qualify for conventional financing. Hard money loans may also be an option if you need money within a short period, and you have no time for the lengthy loan approval processes from banks.
The ability of lenders to fund hard money loans quickly is the main reason people seek hard money financing loans. In most instances, after applying for hard money funding, you can get the financing within one week. For a bank loan funding, it may take between 30 to 45 days to get the funds. The process of applying for hard money loans is simple and may only take a day or two. You may even have your loan approved the same day you apply! It is hard to get your bank loan approved in a week!
Hard money refinance loans can make you stand out from other competing property buyers. For instance, you may be trying to secure a property with competing bids. You can easily get the attention of the seller if you can secure a loan faster than buyers seeking slow traditional financing.
At times, banks may reject you, making it hard to secure a conventional loan. Your life may not always go as you plan, and you may be a victim of foreclosures, short sales, or credit issues. In such circumstances, hard money loans may be a viable option for you as they are easy to acquire.
Hard money loans are short-term loans, mainly repayable within 1-3 years. Most people acquire a hard money loan, and afterward, refinance the hard money loan to a conventional loan that is repayable within a longer-term. You may acquire a hard money loan with the intention of refinancing it to a long-term conventional loan only for your plans to fail. In such a case, you may need to refinance your existing hard money loan with another hard money loan from a different lender.
You may also opt to refinance a hard money loan if your property appreciates. Appreciation of your property allows pulling additional equity from the property.
You can also refinance and reinvest with a hard money loan. You may pull equity out of an existing property through a hard money loan and use it as a down payment for an additional property. Hard money loans allow investors to take advantage of investment opportunities and to achieve their investment goals.
In the U.S., most people use hard money loans for fix and flip deals. Investors acquire short-term private money loans to purchase and renovate a property and then flip the property for a profit.
Before you apply for a hard money loan, ensure that you have a well-thought-out exit strategy, such as selling your property and repaying the loan or acquiring a conventional loan to clear the private money loan. This will prevent you from facing the consequences of the default of a hard money loan. Hard money lenders may not give you options as conventional lenders do if you default.
When choosing a private money lender, inquire about how the lender handles default or how the lender would react if you are unable to refinance the loan within the stipulated time. Some lenders have flexible repayment options and may be patient with you in case of default. Go for a reasonable money lender who may be willing to work with you in case a problem arises.
Interest Rates for Hard Money Loans
The interest rates charged for hard money loans may vary from one lender to the other. Interest rates also depend on the region. For instance, In California, rates for hard money loans are lower compared to other parts of the country. There are many money lenders in California; an increase in competition among the money lenders leads to a decrease in interest rates.
The interest rates for hard money loans are higher than the rates for loans acquired from traditional lenders. There is a higher risk involved in issuing hard money loans, thus the higher interest rates. Depending on the lender and the perceived risk of the loan, interest rates may range from 10-15%. Points for hard money loans are slightly high and range from 2-4% of the total loan amount. The interest rates and the points also vary depending on the loan to value ratio.
What is Loan to Value Ratio?
The loan to value ratio (LTV) is obtained by dividing the loan amount with the value of a property. Hard money lenders determine the loan amount to lend by considering the applicable loan to value ratio. In most cases, money lenders will give up to 65 percent to 75 percent of the current value of the property. Some lenders may consider the after repair value of a property (ARV). This is the approximated value of a property after the borrower improves it. A hard money loan lender may charge higher interest rates for loans based on after repair value of a property as they have higher risks.
Some money lenders are very flexible and may lend a very high percentage of ARV and go the extra mile of financing rehab costs; this may sound like a great advantage to borrowers. However, it is important to note that these loans may have a much higher risk, and their corresponding interest rates are very high.
What Do You Need to Qualify for a Hard Money Loan?
Hard money loans have fewer requirements than conventional loans, making it easy for many borrowers to qualify for lending. You can secure a hard money loan even with a poor credit rating. However, hard money lenders may still require you to meet some requirements before granting you a loan facility. Some of the factors that hard money lenders consider include:
Hard money lenders are interested in the profits gained after lending to you. In deciding whether to give you a hard money loan, the lender will consider if the deal is profitable or not. For profitable deals, you can instantly access hard money loans. For example, it would be profitable to use a hard money loan to purchase a residential property, renovate the property, and then resell the property at a higher price.
- Loan to Value Ratio
Hard money lenders also consider the loan to value ratio when making lending decisions. This is the ratio between the loan given and the value of the property used as collateral. For example, if you are buying a property worth $100,000, and you request for a hard money loan of $60,000, the loan to value ratio would be 60%. Often, hard money lenders prefer loan to value ratios of between 60-70%. On the other hand, banks accept a higher loan to value ratios of up to 97%. With lower LTV, hard money lenders take less risk than conventional banks when lending money. It is for this reason that private loans lenders are comfortable to lend even to people with low credit scores while banks are careful about whom they lend money to.
- Type of Project
Before giving you a loan, hard money lenders may be interested in knowing the purpose of the loan or the type of project you want to finance. Since it is a short term loan, hard money loans may not be suitable for purchasing full value property. Instead, hard money loans are suited for projects such as cash-out refinance. This entails seeking a hard money loan to pay off an existing loan and remain with some extra cash.
If you have high equity, you have a great chance of qualifying for private money loans. If you make a wise investment, you can get instant equity from a new property. For instance, if you buy a home worth $100,000 at a discounted price of $70,000, you instantly get $30,000 of equity.
- Your Financial Situation
A hard money lender may not pay much attention to your financial situation as many banks do. However, the lender has to be sure that you can hold up your end of the bargain. Therefore, hard money lenders may seek to understand your income levels. To determine whether you will be able to make the monthly payments, the lender may request for your tax returns.
A lender may also consider your debt to income ratio. If you are overburdened by debts, it may be an indication that you are not capable of repaying a hard money loan.
If you intend to fix and flip a property, the hard money lender may seek to know if you have adequate experience in fixing and flipping properties. The higher your level of experience, the higher the chances of securing a hard money loan.
How to Find the Right Hard Money Lender
In California, there are numerous hard money lenders to choose from. Choosing the right lender is important as it will have a great influence on the interest rates for your loan, the amount you qualify for, and the flexibility of the repayment. It is therefore important to evaluate various lenders before choosing the one that suits your needs best. Some strategies for identifying the right lender include:
- Identify Potential Lenders in Your Area
Usually, hard money lenders restrict their lending to their local geographical locations as they fully understand the housing market in their local area. Identify the various lenders who operate in your local region or in the region where your property is located. You may get leads from conventional lenders and brokers as they happen to know private money lenders as well. You may also use the interest to search for hard money lenders in your region.
- Evaluate Each Hard Money Lender
After coming up with a list of potential money lenders, take some time, and evaluate each lender at a time. Consider certain factors such as the interest rates offered by the lender, the loan application process, and the loan repayment terms. You may check the reputation of every lender at your local department of consumer affairs to avoid falling prey to fraudulent money lenders. Since hard money loans come with higher interest rates than traditional loans, it is important to take time to identify a lender that offers an affordable rate
- Gather the Necessary Documents
When giving loans, hard money lenders emphasize the value of the borrower's property/ collateral. The lenders will calculate the loan to value ratio of the property you are refinancing when deciding to offer you a loan. If you have higher equity in your property, you are likely to qualify for a higher amount of hard money loan. To prove the value of your property, you need to gather all the necessary supporting documents. The lenders may request for additional documentation such as the documentation for other outstanding loans, credit reports, or tax returns. The lender may need to very that you can repay the loan; your supporting documents can prove this.
- Identify Your Preferred Lender
Once you have settled for one lender, you can call the lender’s office or visit the lender's website to fill the loan application form. Most money lenders ensure that they design the application process to be simple, quick, and straightforward. As long as you qualify, your loan may be approved within a few days.
- Payoff the Primary Loan of Your House
Once the hard money loan is approved, you will use its proceeds to clear/pay off the primary loan on your property. Remember to update the transaction with the local recorder of deeds. The hard money loan will become your primary mortgage.
- Obtain a Long-term Conventional Financing to Clear the Hard Money Loan
A hard term money loan serves as a short-term loan. Due to its high-interest rates, a hard money loan may be expensive on a long-term basis. Most hard money loans do not go beyond a two-year repayment period. After acquiring a private money loan, you should focus on working on both your financial and your credit history to help you qualify for a conventional loan. If you do not intend to acquire a long-term conventional loan, you may opt to sell off your house and use the proceeds to clear your hard money loan and keep the remaining equity.
Find a Trusted Private Money Loan Lender Near Me
Different private money lenders have different terms and policies. It is therefore important to take time to understand the offers from different lenders before making a decision. At the Money Lender Loans in Orange County, CA, we offer the best in terms of rates and points for hard money refinance loans. Contact us at 949-409-4372 and enjoy a simple loan application process and a guarantee of getting the funds within a short period.