The Ultimate Guide to California Hard Money Loans
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Let’s be honest, in California’s real estate market, opportunities don’t wait for bank approvals.
Deals move fast, and it’s usually the investors with access to capital who win.
When investing in real estate, timing is everything. California’s fast-paced real estate market is no different, as timing can make or break a deal.
Since traditional bank financing often moves too slowly for investors to capitalize on time-sensitive opportunities, many borrowers turn to hard money loans for fast, flexible capital to fund their real estate projects.
Hard money loans (also known as private money loans or bridge loans) are now a mainstream financing option in the California real estate market, used by investors, business owners, and homeowners to acquire, refinance, or renovate properties unable to qualify for a conventional bank loan.
This guide provides a complete overview of hard money loans in California, including how they work, who uses them, types of loans available, lender qualification criteria, typical costs, common terms, and various strategy tips to improve your approval chances.
What is a Hard Money Loan?
Hard money loans are short-term collateralized loans secured by real estate, where the focus is on the property’s condition, location, and equity, unlike traditional mortgages, which focus on the borrower’s income, tax returns, or debt-to-income ratio.
Big banks, while flush with capital, tend to be more risk-averse and stringent on their underwriting process, making them unable to offer this type of financial product and its benefits to their borrowers.
Searching for “best private money lenders in California” on Google will return a list of results featuring high-net-worth individuals and boutique lending companies, capable of funding a real estate investor’s deal, up to millions of dollars in less than a week.
Borrowers who use hard money loans in California’s competitive real estate market gain a clear advantage when bidding on properties, since these offers are often treated as all-cash, and without contingencies that sellers prefer to avoid.
Key Hard Money Loan Terminology
Understanding hard money loan terminology helps borrowers make informed decisions. Here are a few hard money loan terms you’re likely to encounter when applying for a loan:
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Loan-to-Value (LTV): California hard money lenders typically lend between 60% to 75% of the property value. For example, a property worth $1 million might qualify for a $700,000 loan, which would be a 70% LTV.
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Combined Loan-to-Value (CLTV): A ratio that measure the total amount of all loans secured by a property divided by its appraised value.
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1st Trust Deed: A loan secured by real estate, essentially the same as a first mortgage. It serves as the primary lien on a property and ensures the lender is paid first if the borrower defaults.
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2nd Trust Deed: A junior loan secured by real estate that sits behind the first trust deed, meaning the second-position lender is repaid only after the first lender is paid in full from the foreclosure sale.
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Interest Rates: Usually between 9% and 12%; however, they depend on various factors, such as property condition and location, loan position (1st or 2nd lien), and the borrower's financial strength.
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Points (Origination Fees): 1 point = 1% of the loan amount. Most lenders charge 1–3 points at closing, so if a lender charges 2 points for a $1 million loan, that equates to a $20,000 fee for the lender.
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Term Length: Most loans last 12 months, but can range from 6 to 24 months since they are designed for short-term projects or bridge financing.
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Pre-payment Penalty: 6 month pre-payment penalties are the norm, but sometimes can be negotiated down to 3 months
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Payments: Hard money loans are almost always interest-only loans, which helps keep monthly payments down.
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Collateral: The vast majority of lenders require property as a form of security, and some lenders may also ask for a personal guarantee, depending on the circumstances.
Why Borrowers Choose Hard Money Loans
In California, hard money loans are most commonly used by homeowners, business owners, and real estate investors.
These borrowers typically select hard money loan financing for:
- Time-sensitive property acquisitions
- A distressed property purchase that won’t qualify for a traditional bank loan
- Fix-n-flips, where funding is only needed for a year or less
- Business owners looking to expand operations
- People transitioning from one home to another
The main reasons borrowers obtain a hard money loan include:
- Need for Speed: Hard money lenders can fund real estate deals in 5 to 7 days, whereas banks take 1 to 2 months.
- Flexible Terms: Flexible deal structures, short-term loan options, and simplified underwriting are all designed to align with each borrower’s unique goals.
- Asset-based lending: Approval is primarily based on property value and borrower equity, not the borrower’s financial history.
- Attractive Opportunity: Perfect for time-sensitive deals, such as bridge financing or a quick rehab.
How California Hard Money Loans Work
Securing a California hard money loan from a private lender is a simple and straightforward process, unlike banks, which require mountains of documentation, multiple forms of ID, and seem to take a three-week coffee break before even reviewing your application.
Here’s a breakdown of what to expect, from start to finish, when applying for a hard money loan:
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Pre-Qualify: Contact a hard money lender, explain your loan scenario, the use of funds, the duration for which you need the money, and your exit strategy for repaying the loan.
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Loan Application: Submit basic property and financial details.
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Property Appraisal: The lender assigns a value to your property, usually through an appraisal or broker opinion of value (BPO), paid for by the borrower.
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Loan Terms: Once approved, the lender gives a breakdown of the terms, including loan amount, interest rate, and term length.
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Funding: Once the loan documents are signed and escrow is completed, funds are usually disbursed immediately.
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Exit Strategy: While borrowers typically make interest-only payments throughout the duration of the loan, the remaining principal must be repaid in a balloon payment at loan maturity. Common exit strategies for making this payment include selling the property, refinancing into a traditional bank loan, or using outside funds.
How Hard Money Loans are Funded
A hard money lender’s role is to carefully evaluate both the borrower and the property to minimize risk, ensuring a successful loan outcome. Because these loans are secured by the collateral property, the lender’s risk is directly tied to the market value of that property.
Here are the key factors lenders consider when funding a loan.
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Borrower’s Ability to Pay: Can the borrower fulfill monthly interest-only payments for the duration of the loan.
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Exit Strategy: Borrower has a clear and realistic way to repay the loan, whether through a sale, refinance, or other means.
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Equity in the Property: Verifying the borrower has sufficient equity to protect the lender in the event of foreclosure.
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Property Value and Marketability: Assessing the property’s current condition, location, and resale potential to ensure it can cover the loan if necessary.
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Risk of Default: Evaluating factors such as borrower experience, financial stability, and project complexity to minimize the likelihood of nonpayment.
How Much Do Hard Money Loans Cost?
Hard money loans offer speed, flexibility, and customizable terms; however, these conveniences come at a price.
Understanding the various costs helps borrowers make more accurate project projections and compare lenders effectively.
The true cost of a hard money loan depends on a number of factors, such as project type, borrower experience, property type, condition, and location.
For instance, a commercial strip mall in West Los Angeles with credit-worthy tenants, on long leases, and a low LTV will receive more favorable terms than a rundown apartment complex in a rural town.
With that in mind, here are the most common costs associated with a California hard money loan:
Interest Rates
Interest rates generally range from 9% to 12% annually, depending on the following risk factors:
- Property type and location
- Borrower’s experience
- Loan amount
- 1st or 2nd lien position
In highly desirable California markets where property values are stable, rates should be on the lower end of that range.
Origination Points (Fees)
Hard money lenders typically charge between 1 and 3 points in origination fees, collected upfront at funding. On a $500,000 loan, 2 points would amount to a $10,000 fee paid to the lender for processing and approving the loan.
Extension Fees
Sometimes projects take longer than anticipated. If a borrower needs more time beyond the original agreed-upon terms, lenders often charge an extension fee of 1% of the loan amount to extend the loan another 6 to 12 months.
Closing Fees
Borrowers are also responsible for standard closing costs, such as:
- Appraisal or broker price opinion (BPO)
- Escrow and title fees
- Loan doc preparation
- Notary fees
Expect to pay between $2,000 and $5,000, depending on the deal.
Default Interest & Late Fees
Missing or delaying a payment can trigger default interest, typically increasing the rate by 2% to 5% above the original loan rate.
Pro Tip
Hard money loans are not cheap; a difference of 2 to 3 origination points could increase your costs by tens of thousands of dollars. The same holds true for the interest rate.
Therefore, shop around for a direct local hard money lender in your area, as using an intermediary broker will only add more origination points to your already costly loan.
Overall, hard money loans are more expensive than traditional mortgages, but make sense for investors who value fast access to capital and flexibility.
Common Types of California Hard Money Loans
California hard money lenders provide a wide range of loan programs to meet the diverse needs of investors, homeowners, and business owners.
Each loan type serves a distinct purpose, from funding a quick renovation to unlocking equity or bridging the gap between property transactions.
Here are some of the most common types of hard money loans available in California:
- Fix-&-Flip Loans: Excellent option for both new and experienced investors looking to buy, renovate, and quickly resell properties for profit.
- Bridge Loans: Short-term financing that helps borrowers transition smoothly from one property to another before permanent financing is in place.
- Purchase Loans: Enables investors to move fast on competitive deals and make strong, all-cash-style offers in a hot market.
- Cash-Out Refinance Loans: Allows property owners to access their equity for renovations, new investments, or other financial needs.
- Probate & Inheritance Loans: Provides heirs with immediate access to funds secured by inherited property to cover taxes, debts, or estate expenses before probate is finalized.
- Business Loans: Used by business owners and entrepreneurs to access working capital or finance expansion opportunities.
- Rental Property Loans: Designed to acquire or refinance income-producing properties and grow long-term real estate portfolios.
- Second Position Loans: Designed for borrowers who already hold a first mortgage with available equity but require additional financing. As a subordinate lien, it involves higher interest rates to compensate for the elevated risk.
California Hard Money Lending Qualification Criteria
Unlike banks that scrutinize tax returns, income history, and debt-to-income ratios, hard money lenders focus mainly on the property and the borrower’s equity.
Each California hard money lender has their own unique lending criteria, but certain borrower qualification standards are a necessity across all lenders.
For example, borrowers must have “skin in the game”. This shows financial commitment from the borrower and reduces the lender’s risk in the event of a foreclosure.
Lenders also take into consideration:
- Property Location: Well-positioned properties in largely populated cities across California, such as Los Angeles, San Diego, Orange County, and the Bay Area, are desirable lending locations for lenders, as they are historically stable markets.
- Loan-to-Value (LTV): Borrowers are usually required to put down between 25% to 35% of the property value.
- Experience: Repeat investors or flippers with a strong track record have an easier time getting funding and often receive better terms.
- Property Condition: Well-kept assets have less risk than distressed properties, making them less complicated to finance.
- Exit Strategy: The borrower has a realistic plan to repay the loan by selling, refinancing, or using outside funds.
- Reasonable Credit Score: While not the main factor, credit history can influence rates and terms.
Looking to improve your chances of approval? Check out How to Get a Hard Money Loan in California to see what lenders look for and how to avoid common mistakes.
How to Find the Best Hard Money Lender in California
Always go local!
Not all California hard money lenders are the same.
Does selecting a hard money lender from Florida to fund your project in Los Angeles sound like a good idea?
Out-of-town lenders usually lack the local market knowledge, real estate connections, and swift responsiveness that are crucial to closing deals quickly and efficiently.
Conversely, choosing a local direct California hard money lender gives you the advantage of working with professionals who understand neighborhood real estate values and local trends.
They can make faster lending decisions because they know the area like the back of their hand.
When choosing a hard money lender, look for:
- Local Market Knowledge: A lender located in your city where your project resides will understand property values, regulations, and regional trends.
- Transparency: Clearly displays fees, rates, and timelines.
- Track Record: Check reviews, testimonials, and previous projects funded.
- Licensing and Compliance: Verify that the lender follows California Department of Real Estate (DRE) or DFPI regulations.
- Flexibility and Service: The best lenders work closely with borrowers to structure deals that make sense for both sides.
For more background, check out How To Find The Best Hard Money Lender in California.
Case Study: Los Angeles Hard Money Loan
Crescent Lenders, a Los Angeles hard money lender recently funded a $950,000 hard money loan for a dilapidated, non-performing five-unit multifamily apartment complex in Glendale.
After the appraisal process, it was determined that the subject property was valued at around $1.5 million in its current run-down condition.
The borrower owned the property free and clear and needed capital to renovate and stabilize the units. With a loan-to-value ratio of 70%, we quickly provided the funding, allowing the borrower to begin construction immediately.
An experienced construction manager was hired to oversee the six-month renovation, giving Crescent Lenders assurances of a smooth construction process.
Once the renovations are complete, the borrower plans to refinance into a long-term conventional loan, turning the property into a steady income-producing asset.
This is a prime example of how to use a California hard money loan to your advantage by maximizing your investment opportunity.
Handpicked Resources
Hard Money Guide Hard Money
What is Hard Money? Bridge Loans
How Long Does It Take? Hard Money
How To Get A Hard Money Loan in California Hard Money
Why Using a Local Los Angeles Lender Matters Hard Money
Glossary of Terms
About the Author
Russell Barneson Hard Money Lending
Russell is a seasoned real estate investor, writer, and hard money lending strategist, as well as the co-founder of Crescent Lenders. He holds a degree from the University of Southern California’s Marshall School of Business. Outside of work, Russell enjoys surfing and spending time outdoors with his dog, Amy.