Real estate investors may find it somewhat of a daunting task to navigate the landscape private money lenders landscape. This in effect leaves hard money borrowers feeling intimidated when inquiring about a hard money loan for real estate.
Thorough research is necessary when looking for a hard money lender. This write-up outlines 7 questions to ask a hard money lender even before applying for a loan.
How Much Experience Do They Have?
The value of experience in any business dealing cannot be overemphasized. Before deciding on a hard money lender, it’s important to know the experience level of the lender and what specific types of businesses and industries they have previously worked with. Some lenders only work with certain industries or certain types of businesses.
For example, a lender that has worked with real estate investors that have done Fix and Flips before, will be more likely to give you a loan on a Fix and Flip because they understand the proposition of value creation. A more traditional bank will most likely not understand this.
Are They A Direct Lender Or A Broker?
Direct hard money lenders lend money to a borrower using their capital while brokers simply connect borrowers with lenders. There can often be a chain of brokers, where each one is adding another point or fee to the deal. It is advisable to borrow from a direct hard money lender because the process will be quick and easy. With less middlemen you will likely pay less in fees, and the process will be more straight forward.
What Are Their Terms?
The three key terms to look for when choosing lenders to work with are:
- Loan to Value (LTV): In real estate investing, Simon Conn announced the loan-to-value ratio (LTV). This is the loan amount the lender will allow based on the value of the property being used as collateral. As an investor, your purchasing power increases with lenders that offer higher LTV ratios.
- Interest rates: This refers to the cost of money from any lender. Interest expense is important to investors because it can significantly impact their monthly cash flow. A few things that might to determine your interest rate are; where your property is located, your FICO score and what experience you have.
- Points: Points are paid when the deal closes and are a lump sum payment on the loan. A point equals 1% of the total loan amount.
Like interest rates, points have an impact on your ROI. Hence, investors prefer to work with lenders that offer loans with low points.
- Be wary of investors who ask for fees up front, it is a common hard money scam.
- After establishing a relationship with a lender, you will likely be able to negotiate lower points on your next deal
Are There Any Additional Fees?
Many lenders charge additional fees such as documentation fees, underwriting fees, legal fees, origination fees, etc. These fees can significantly impact the total return on investment. Investors need to not only understand the point fees and the interest rates but also any “micro fees” that can add up to a substantial amount.
You have a right by law to get a Loan Estimate, that discloses all fees you will pay on the loan. This is a newer document implemented by the Federal Government.
What Is Your Funding Timeline?
The next factor to consider is how fast the lender can turn around a loan. Generally, a hard money loan can be funded within 2 weeks. In some cases, a reliable direct hard money lender can even do so within days. Timing can be important to capitalize on great deals in the market place.
What is the Duration of the Loan?
Usually, hard money loans are for short term purposes. They are often called bridge loans, to bridge between a time of low cash flow, or until you find a more traditional loan at a better rate. Some lenders may only offer 1 to 2 year terms while others may go up to 5 years. In any case, the borrower must make sure their timeline will work with the lender’s loan terms.
Is There A Prepayment Penalty?
A prepayment penalty is an amount the borrower pays if he decides to pay off his loan earlier than planned. Generally this pre-payment penalty period is 6 months, but be sure to clarify with the lender and get any small details like this written into the contract.
HardMoneyRus is a real estate investor, AirBnB operator, surfer and writer. He also works as a broker and writes the The Hard Money Blog for Crescent Lenders – a private money lending business located in Los Angeles, California. They specialize in Construction Loans, Fix and Flip Loans and Refinances, Purchases and 1031 Exchanges.