In California and other states, hard money loans for real estate use a piece of property as collateral. Lenders make these loans based more on the value of that property than an applicant’s credit history and ability to repay. If a borrower doesn’t repay the loan, lenders can sell the piece of property to recoup some of their money.
Higher Interest Rates Than Traditional Loans
Hard money loans, also called bridge loans, are riskier than traditional loans since the borrower’s credit history and ability to repay are less important. To balance that risk, lenders charge interest rates higher than those found on traditional loans.
The interest rate can range from 7.5% to as high as 15%. By comparison, 30-year mortgage rates range from about 3.3% to 7.9%. Different lenders distribute hard money loans california, and it is worth your while to talk with a few lenders for the best interest rate you can get.
The reason behind the loan can factor into how high (or how low) the interest rate is. For instance, many lenders charge somewhat lower rates if the purpose of the loan is to rehab or flip a home versus to build a home to flip. Hard money loans also come with appraisal fees and charges for titling and recording, among other things.
Advantages Over Traditional Loans
Hard money loans do have several advantages over traditional mortgage loans. For example, hard money loans meet the following criteria:
- Speedier (approval and funding take a few days to a few weeks versus up to 45 days for a bank loan)
- Shorter financing period, usually one year to three years
- Borrowers with poor credit histories can qualify
- Each application is considered individually
- Flexible repayment terms
- Can be used for residential, commercial and industrial real estate
Borrowers use hard money loans to finance single-family homes, fix-and-flip properties, temporary housing, apartment buildings, business properties and more. Before you apply for such a loan, have a clear idea of how you’ll pay it off. For instance, if you flip houses, you’ll probably use the loan to purchase a property to renovate and flip. When you sell the property, some of the proceeds go to pay off the loan.
Common ways to repay hard money loans include selling a property or refinancing with a new loan (hard money, subprime or conventional). For example, one to three years is enough time for some borrowers to qualify for traditional loans. Many investors frequent the same lender to finance their ongoing real estate purchases.
Loan-to-Value Ratio
Lenders may fund borrowers up to 65% or sometimes even 80% of the collateral property’s value. Lenders want their borrowers to have a bit of a stake in the property too, as this increases the chances of them repaying the loan. So, say the value of the collateral is $100,000. A hard money loan might be made for $65,00 or perhaps as much as $80,000.
When you talk to various hard money lenders, consider the interest rates they charge, any prepayment penalties and the loan-to-value ratio you qualify for.
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