If you are in the business of brokering loans, then you know what a hard money loan is. However, for those of you just starting out in the arena of brokering loans, and for the education of our readers in general, today on the Rules of Thumb blog from MoneyThumb we are going to talk about what hard money loans actually are before diving into our 5 tips to being a successful hard money lender.
Loans are commonly referred to as “hard-money” loans because lenders use a “hard asset”--traditionally, real estate--to secure the loans. Many hard-money lenders focus their investments on single-family homes and commercial properties. Because private lenders often are focusing heavily on a hard asset with a low loan-to-value ratio, many lenders are able to look past some credit issues. In other words, hard-money lenders rely on a borrower’s equity in a property to act as their security.
Hard-money lenders are privately funded and not regulated like traditional banks. This raises the question of how to successfully close a hard money loan with a reputable lender. Consider the following five tips when obtaining hard-money loans for your clients:
- Be cautious when it comes to unreasonable upfront fees. A lender may require a third-party appraisal, but mortgage brokers and originators should know that many private lenders who ask a borrower to submit large sums of money for “due diligence” are typically not real lenders. Often, these deals never close at all, leaving your borrower short of thousands of dollars. Be wary if a lender asks for more than 0.5 percent of the total loan amount in this respect.
- Watch for brokers masquerading as lenders. Some people who claim they’re direct hard-money lenders may in fact be brokering the deal to another party — without disclosing this to you, of course. Considering that, it’s vital to have a clear understanding of who the decisionmakers are in the lending process, and it’s equally as important to obtain verification that your “lender” actually funds its own loans.
- Provide full disclosure of all material items. Simply put, it’s crucial for brokers to disclose any information that could materially impact a transaction. This information might include tax liens, title issues, and certain time-sensitive issues. Mortgage professionals can be virtually certain that a lender will discover problematic information eventually, so it’s always a good idea to disclose this information right away, and in doing so, help all parties take the necessary steps to resolve the issues at hand.
- Be wary of possible bait-and-switch deals. Some hard-money lenders avoid detailing certain aspects of the loan process such as document requirements, site inspections, title issues, environmental considerations, etc. With that in mind, you need to understand the steps and time required for each part of the loan’s overall process and keep an eye out for any red flags.
- Watch for terms that are out-of-line with market realities. Finally, brokers should know that there are some hard money lenders who prey on individuals with less-than-perfect credit claiming that they can close deals no other lender can. The fact of the matter is that if a deal sounds too good to be true, it very well may not be true. In these cases, trust your instincts and do not proceed with the transaction.
Although hard-money lending differs in many respects from conventional lending, mortgage brokers and originators shouldn't shy away from considering this alternative source of financing for their clients. In the right circumstances, hard-money loans may offer the solution to your client’s financing needs — and a new source of revenue for your lending business.