Guide to Understanding Hard Money Loans in Southern California (2024)

Investing in the Southern California real estate market can be a lucrative avenue for wealth creation, and it’s a fantastic way to diversify your income.

Have you identified an opportunity to invest in some of California’s best neighborhoods by purchasing and renovating distressed homes? But, as a novice investor, you don’t know how to fund such a project?

A hard money loan is a fantastic alternative when you are unable or don’t want to secure funds through a traditional lender. Made specifically for real estate professionals such as fix and flip investors, these short-term loans are generally underwritten based on the asset you provide as collateral instead of your credit score.

Hard money loans are a real estate investor’s best friend because they are often the quickest path to securing a deal. However, hard money loans tend to be costly and risky, especially if you’re a new real estate investor. Here’s what you need to know about Southern California hard money loans before signing on the dotted line.

Understanding Hard Money Loans

A hard money loan (sometimes called an asset-based or bridge loan) is a loan backed by a “hard” asset. Backing by a hard asset means that the collateral is evaluated instead of the borrower’s financial profile, as with traditional mortgages.

Southern California house flippers often use this type of loan to secure short-term financing for renovations. Generally, hard money loans are a source of funds with which the real estate investor can acquire then renovate the property, improving the after-repair value (ARV) before selling it later for a substantial profit.

Traditional mortgages aside, there are short-term, conventional loans, such as fix-and-flip or rehab loans. Still, these have a rigorous underwriting process that may take several months for approval. But with a hard money lender in California, you can get approved in less than a week, as long as you qualify.

Southern California hard money lenders are not interested in your income and credit history and give out loans based on the property instead, which is the collateral. However, some lenders can decide whether they would like to run a credit check on borrowers and, if so, what types of requirements they will have in place for approval.

When Should You Use a Hard Money Loan?

Real estate investors generally pursue hard money loans because they either don’t qualify for a traditional loan or need the money urgently.

With short repayment periods of six months to five years, hard money loans are ideal for short-term projects, such as when an investor quickly decides to fix and flip a property for profit.

Other investors use hard money loans to fund renovations on a property, and then they refinance to a traditional mortgage with lower interest rates.

Who Uses Hard Money Loans and Why?

The types of real estate investors who tend to go for hard money loans include:

• Fix-and-flip investors
• Buyers who don’t qualify for conventional loans

» Fix-and-Flip Investors

House flippers are real estate professionals who purchase distressed properties, fix them up, and then resell them for a profit. House flippers like hard money loans because they can get the cash fast, which is beneficial when bidding on a property.

Also Read: The Complete Guide To Fix And Flip Loans

» Buyers who Don’t Qualify for Conventional Loans

Sometimes urgency is not the issue. Maybe a real estate investor is unable to qualify for a traditional loan. It could be because of various reasons such as a poor credit score or challenges in proving income.

How are Hard Money Loans Different from Traditional Loans?

Hard money lending is, in some ways, similar to a conventional loan. You apply for a loan. If you are approved, you get the funding. Later, you repay the loan with interest over a predetermined term.

However, the difference between hard money lending and conventional bank loans lies in the details. Precisely, the application process, the loan terms, the purpose of the loan, and the repayment plan of hard money loans differ in substantive ways from conventional loans.

So, how does hard money lending differ from conventional lending?

Differences Between a Hard Money Loan Vs. Soft Money Loan

Hard money versus soft money: what’s the difference?

» Application for Hard Money Lending in Comparison to Conventional Lending

The application process for hard money loans generally involves less documentation than a traditional loan. Moreover, the applications for both types of loans require different documentation.

» Debt to Income (DTI) Ratio

A traditional lending institution is primarily concerned about your creditworthiness in deciding whether to approve a conventional loan. The bank’s primary concern is whether you have enough income to repay the loan. It is why banks require proof of employment, income verification, and a credit report with your loan application. Conventional lenders then use this information to determine your DTI ratio.

You can calculate your debt to income ratio by dividing your monthly debt payments by your monthly gross income. For a bank to consider you for a traditional mortgage, you generally need to score a DTI of less than 45%.

» Loan to Value (LTV) Ratio

Hard money lenders focus primarily on the soundness of your investment in deciding whether to approve hard money loans. The main question hard money lenders ask is whether the asset’s value can cover the loan. It is why hard money lenders want to see a property appraisal with your loan application.

You can calculate your investment’s LTV ratio by dividing your requested loan amount by your asset’s after-repair value (ARV). In simple terms, if your project involves a fix-and-flip, the ARV is the appraised value after the “fix.” The ARV is the appraised value if your project is a straight flip. For example, if you need a loan of $65,000 to buy an investment house and the ARV is $100,000, the loan-to-value ratio is 65%.

While most hard money lenders prefer an ARV of less than 75%, the exact cutoff will vary. Generally, hard money lenders need a cushion of at least 30% if you default, and the asset needs to get sold to repay your loan. A higher LTV ratio such as 70% ensures that you have a stake in the project’s success and will be less likely to walk away from the hard money loan simply.

» Speed of Approval and Funding

One massive benefit of hard money loans is that they can often be approved quicker than conventional bank loans due to less documentation and fewer data points to consider in approving a loan. On average, it takes a month to get a mortgage application approved. Most sellers aren’t willing to wait 30 days for a buyer to receive loan approval.

Once the bank approves the mortgage, it often takes three business days to fund the loan. For example, if they accept your offer on Friday, closing would not be scheduled until Wednesday or Thursday.

On the other hand, hard money loans consider fewer data points in approving loan applications. Moreover, an investment property lender knows that time is of the essence for real estate investors who have found a suitable investment property. While times vary, many Southern California private money lenders can approve and fund a hard money loan within seven calendar days.

» Comparison of Loan Terms for Hard Money Lending and Conventional Lending

Loan terms vary depending on the hard money lender, but they structure such loans for repayment over a short period rather than 30 years like a traditional mortgage. This difference in loan terms is due to the different uses of the loans.

» Mortgages are for Owner-Occupied Residences

Mortgage companies structure their loans based on the assumption that the property is a primary or secondary residence that the owner will occupy for the long term. Therefore, mortgages have a 15, 20, or 30 years long repayment period. It keeps payments low and results in a loan in which the first decade or so of loan payments goes largely to interest.

» Hard Money Loans are for Investment Properties

Unlike mortgages, investors use hard money loans for investment properties that will later be sold or used to generate rental revenue. Therefore, hard money loans have a short repayment period of several months to two years. They are structured to give you the time to monetize the property then clear the loan so you can move on to acquire the next investment asset.

Can you use a Regular Hard Money Loan to Purchase Personal Residences?

No, you can’t! However, private money loans are a thing, and they allow private residents who can not acquire a traditional mortgage to purchase a home. Private loans offer much more lenient requirements than conventional loans.

In California, hard money lenders often exclude people from using hard money loans to buy private residences. It is mainly because of the Dodd-Frank Act, which limits the flexibility of lenders to approve mortgage applications. It protects home buyers from mortgages entirely out of their ability to repay.

What Interest Rates and Loan-to-Values can You Expect?

Although interest rates vary from one Southern California commercial property lender to another, the average hard money loan interest rate for 2022 is 10-15%. Still, it may range between 7% and 15% annually, depending on the lender.

Hard Money Loan to Value Ratios

You can calculate the loan-to-value ratio by dividing the total loan amount by the asset’s value backing the loan. Southern California hard money lenders typically offer a loan amount of 60% to 75% of the collateral asset’s value. Therefore, the borrower has to pay a down payment of 25% to 40%.

Getting Approved for a Hard Money Loan

The loan requirements for Southern California private money loans vary from lender to lender, but generally, there are three main hard money loan requirements:

• Equity
• Overall financial strength
• Experience in real estate

» Equity

A critical requirement for getting a hard money loan is possessing the required equity or down payment in a particular asset to use as collateral for the loan.

The down payment usually ranges from 25% to 40% for residential buildings and 30% to 40% for commercial properties.

» Overall Financial Strength

Another main hard money loan requirement is that the investor has cash reserves to make monthly loan payments and holding costs. Holding costs may include things like taxes, insurance, and HOA payments.

Essentially, the higher the amount of cash reserves you have, the more likely you are to get approved for a hard money loan.

While you may have a hard time obtaining a loan with no cash reserves, a lender may be willing to increase the loan amount on the condition that they hold back some of the borrowed funds to cover holding costs, insurance, taxes, and loan payments. It ensures that while the borrower still gets their loan, the borrower will not neglect monthly payments.

» Experience in Real Estate

A new investor borrower might have a more challenging time obtaining a hard money loan than a real estate veteran. If you have little real estate experience, the lender will ask for all project details, including your exit strategy.

How to Improve Your Chances of Qualifying for a Hard Money Loan

Make sure that you present a feasible deal.

Southern California private money lenders are business professionals looking to maximize profits with every loan they give.

The lender will determine the project’s feasibility before approving any loan request. In layman terms, the chances of getting approved are higher once the lender is confident that the property and deal make sense.

Are Hard Money Loans Worth it?

Hard money loans are valuable to first-time and established investors who need to get funding for an investment property quickly, without the hassles of bank financing.

Find Your Southern California Hard Money Lender with RTI Bridge Loans

Are you confident that a property has the potential to generate a healthy property margin, but you are short on funds? Do not let the opportunity slip away. Get a hard money loan today!

Hard money loans are great solutions to various real estate borrowing needs. So, what are the best Southern California hard money lenders near me? You might be wondering.

RTI Bridge Loans is a well-established and reputable lender that will walk with you every step of the way. We are primarily a Direct Portfolio Lender with 30 years of experience investing in all aspects of real estate: from private money lending, residential development, hard money, and fix and flips loans.

Do you have any queries for our team or want to apply for a loan? Contact us today for a free loan quote!