Everything You Need to Know About California Hard Money Loans

California is known for its booming real estate market which presents many lucrative investment opportunities. However traditional lending sources like banks often don’t work well for investors who need to move quickly to capitalize on a time-sensitive deal. That’s where California hard money loans come in.

As experienced real estate investors ourselves we know how challenging it can be to find the right financing when you need it. We’ve used hard money loans many times over the years to fund fix-and-flips wholesale deals, bridge loans, and more.

In this comprehensive guide, we’ll explain everything you need to know about California hard money loans, including:

• What is a hard money loan?
• Hard money loan pros and cons
• Types of California hard money loans
• Loan criteria and requirements
• Interest rates and fees
• How to find the best hard money lender

What is a Hard Money Loan?

A hard money loan is a short-term, asset-based loan provided by private investors rather than banks or mortgage lenders. Also known as private money loans, hard money loans are collateralized by real estate.

Hard money lenders focus primarily on the value of the underlying property rather than the borrower’s credit score or income like banks do. This allows real estate investors to get loans for investment properties when they may not qualify for a conventional mortgage.

The interest rates and fees on hard money loans are higher than conventional loans to compensate the lender for the increased risk. But for many real estate investors, the speed and flexibility of hard money loans make it worthwhile.

The Pros and Cons of Hard Money Loans

Hard money loans offer several benefits for real estate investors:

Speed – You can often get approved and funded in days rather than weeks or months with a bank loan. This enables you to jump on time-sensitive deals.

Flexibility – Hard money lenders can fund a wider variety of deals than conventional lenders, including distressed properties, unconventional properties, short-term projects, and lower credit borrowers.

Lower qualifications – Hard money lenders focus more on the property value and equity invested rather than credit score, income, and employment history. This expands financing options.

However, hard money loans also have some downsides to consider:

Higher interest rates – Interest rates typically range from 8% to 15%, significantly higher than conventional mortgage rates.

Points and fees – Hard money lenders charge origination fees and other charges that can add up.

Short terms – Hard money loans typically have terms of 1 year or less. You’ll need to refinance or sell the property to pay off the loan.

Prepayment penalties – Hard money loans often have stiff prepayment penalties if you pay off the loan early.

Limited capital – Each hard money lender has a finite pool of capital. The funding you need may not always be available.

As you can see, hard money loans allow real estate investors to do deals they couldn’t with conventional financing, but the higher rates and fees are the tradeoff.

Types of California Hard Money Loans

There are several types of hard money loans offered by private lenders:

Bridge loans – Short-term loans to purchase a new property before selling your current one.

Rehab loans – For financing property renovations and “fix-and-flip” projects.

Rental property loans – For purchasing or refinancing investment rental properties.

Construction loans – For financing new construction and property developments.

Business loans – Hard money business loans using commercial property as collateral.

Cash-out refinance – Taking cash out of a property you already own.

Distressed financing – Loans for distressed properties like foreclosures.

Problematic property loans – Financing for unusual properties banks won’t finance.

Joint venture loans – Loans offered in exchange for a share of ownership.

Bridge loans and rehab loans are two of the most popular uses for California hard money loans. The quick funding allows investors to close quickly on short-term deals like flips.

However, hard money loans can be used for almost any real estate purpose by investors who don’t fit the narrow criteria of banks. The flexibility of private financing enables more investors to access the lucrative California real estate market.

California Hard Money Loan Requirements

While every hard money lender has their own specific loan criteria, there are some general eligibility standards you can expect:

• Property value – Most lenders require at least 50% loan-to-value ratio.

• Transaction type – Hard money loans are limited to non-owner occupied investment properties.

• Property type – Most lenders limit loans to SFR, condos, townhomes, and 2-4 unit small multifamily properties.

• Equity invested – Typically at least 20-30% down payment or equity in the property.

• Credit score – Some lenders may require a minimum credit score around 600.

• Loan term – Most hard money loans have a maximum term of 1 year.

• Loan size – Loan amounts generally range from $50,000 to several million.

• Experience – Many lenders want to see some investment experience.

• Exit strategy – You’ll need a plan for repaying the loan via sale, refinance, or extended loan term.

As with conventional mortgages, the better your credentials, the better loan terms you can qualify for as a hard money borrower. More equity invested also tends to result in better lending terms.

Interest Rates and Fees on California Hard Money Loans

The main tradeoff with hard money loans is that you’ll pay higher interest rates and fees than conventional bank financing. Here are some typical costs:

Interest rates – Usually between 8% and 15% depending on your qualifications, equity invested, and competition. Rehab projects tend to get the lowest rates.

Origination fees – Up to 5 points of the loan amount. On a $100,000 loan, that’s $5,000.

Other fees – Doc prep fees, underwriting fees, processing fees. Usually 1-3 points total.

Prepayment penalties – As high as 5% if you pay off the loan within the first year.

Exit fees – Some lenders charge a fee when the loan is paid off.

Late fees – Typically 5% of the monthly payment if you pay late.

Default interest – Interest rate jumps significantly if you default, usually to 18-24%.

As you can see, the fees can really add up with hard money loans. But keep in mind, you’re paying for the speed, flexibility, and access these loans provide. For savvy real estate investors, the higher costs are justified by the ability to do more deals.

How to Find the Best California Hard Money Lender

Not all hard money lenders are equal. Here are some tips for finding the best lender for your particular needs:

• Seek lenders experienced with your type of project – rehab, new construction, bridges, etc.

• Look for great customer reviews praising service and responsiveness.

• Ask about their average funding turnaround timelines.

• Inquire about their loan underwriting criteria to be sure you’ll qualify.

• Ask current and past borrowers about their experiences.

• Compare interest rates, fees, and penalties between multiple lenders.

• Look for lenders that don’t nickel and dime you with junk fees.

• Seek lenders that don’t charge prepayment penalties.

• Find lenders with marketing resources to help you locate deals.

It can take some research to find the right lender, but taking the time upfront will pay off with a smoother process and better loan experience.

The Bottom Line on California Hard Money Loans

Hard money loans provide an invaluable funding source for real estate investors who need to move quickly and don’t fit the restrictive criteria of conventional lenders. By focusing primarily on the property rather than the borrower, hard money loans open up opportunities that would otherwise be unavailable.

Despite the higher costs, in the right situations hard money loans enable savvy investors to achieve success with projects and deals that would be impossible using conventional financing. The access to capital and speed of funding gives investors a competitive edge.