The median home price in California is expected to drop significantly in 2023. You don’t want to miss a real estate opportunity. If traditional mortgages don’t meet your needs, you have other options.
Private money loans give you more flexibility to get the financing you need. Qualifying for a hard money loan may be easier than you think. Keep reading to learn more.
What Makes Private Money Loans Different?
A private hard money loan is a type of secured loan. You can use it to buy hard assets like real estate. The property you plan to buy serves as collateral for the loan.
A private money lender primarily bases the terms of the loan on the value of the property instead of the borrower’s credit. For this reason, you may see hard money loans called bad credit loans.
Traditional lenders don’t offer hard money loans. Hard money lenders are people or companies that see the value in this type of potentially risky loan. Potential lenders include:
- Real estate investment lenders
- Equity companies
- Asset lenders
- Investor groups
You can find large, national lenders as well as smaller regional ones. A regional lender may offer exclusive services you won’t get from a larger company.
How to Qualify for a Private Money Loan
The requirements for qualifying for a private money loan depend on the lender. However, hard money lenders usually look at criteria such as:
- Equity in the property
- Loan-to-value ratio
- Ability to repay
- Real estate experience
Getting a private mortgage loan doesn’t depend on having good credit. However, private lenders may look at your credit score. Some lenders have a minimum credit requirement.
This is more common if you plan to rent out the property instead of flipping it right away. You have to make payments on the loan whether or not you have tenants. This is riskier for the lender.
Equity in the Property
The property you’re buying is the collateral on the loan. You may need a higher down payment than for a traditional mortgage. The down payment lowers the risk for the lender.
A private money lender will often require a down payment equal to 25% to 35% of the total loan amount. The lender may consider the location of the property and your real estate experience when calculating your down payment.
Loan-to-Value Ratio
The down payment is closely related to the loan-to-value (LTV) ratio of your real estate transaction. The LTV compares the value of the property you want to buy with the amount you want to borrow. A lower LTV make the loan less risky for the lender.
The lender may use the after-repair value (ARV) to calculate LTV. Using the ARV is common for properties in poor condition that the borrower plans to repair.
Hard money lenders usually offer loans with an LTV of 65% to 75%. This is why your down payment will typically be 25% to 35%.
Ability to Repay
Borrowers must prove that they have the ability to repay the loan. This typically involves providing proof of income.
You can also use documentation of your overall financial strength, such as other assets or cash. The lender looks at your liquidity. You’ll need to show that you have enough cash on hand to cover loan costs such as:
- Closing costs
- Fees
- Underwriting expenses
These costs are in addition to the down payment and your regular monthly payments.
Real estate investing has known and unknown costs. The more liquid reserves you have, the more confident the lender will be in approving your loan application.
Real Estate Experience
Real estate experience isn’t usually a requirement for getting a hard money loan. However, the lender is more likely to approve your application. You may get a better loan rate.
Borrowers with experience in real estate investing are more likely to be prepared for the risks.
No matter your level of experience, you can increase your chances of loan approval by creating a reasonable repayment plan. You need a clear exit strategy for profiting from the property.
The most common exit strategy is selling the property within the loan period. You can also refinance the hard money loan to a conventional one or sell off other investments to pay off the loan.
Benefits of a Private Mortgage Loan
Using a private mortgage lender has advantages depending on your situation. Hard money loans can be a good fit for people who don’t qualify for a traditional mortgage. A private lender is a good option for house flippers and rental property investors.
No Need for Perfect Credit
One of the main advantages of a private money loan is that the lender doesn’t rely on your credit score. Bad credit loans give you the chance to finance your real estate purchase when traditional loans don’t.
Close the Loan Faster
Private loans close much faster than traditional ones. The lender doesn’t need a thorough and time-consuming review of your financial history. You may be approved within days.
California has a highly liquid real estate market. A faster loan process lets you take advantage of real estate opportunities as soon as they become available. You don’t lose profits waiting for mortgage paperwork.
Get the Loan Amount You Need
With a traditional mortgage, you get pre-approved for a certain loan amount. Then you have to find a property that fits that amount.
A private mortgage loan is based on the value of the property. You get the amount of money you need.
Use the Right Private Hard Money Lender in California
Private money loans are a good option in many situations. The requirements to qualify are straightforward. You need a good loan-to-value ratio and the ability to repay the loan.
Real estate experience will also help you get approved.
Stonecrest is the qualified private lender you’re looking for. We’re licensed and have expertise in the California real estate market.
We offer terms of 12 to 60 months for up to 65% of LTV. You can borrow as much as $5 million depending on your situation.
Contact us today to learn more about how we can help you find the right loan for your needs.
