A hard money broker may be an excellent resource to turn to when you’re in a crunch and unable to get your funds from elsewhere. Hard money lending has its minuses and pluses, but these minuses will diminish when you find a lender whom you trust and with whom you can strike a helpful deal. Here are seven questions that you may want to ask a hard money broker before signing your transaction.
- What Is Your Experience? – Lenders deal with one or more states. All have to be certified by their state regulatory agencies to lend funds. Money lenders also have to carry additional National Mortgage Licensing System (NMLS) endorsements. All brokers should be properly licensed with either the Department of Corporations or the Department of Real Estate. You’ll want to know what they’ve done in the past and who their clients are and were. Whilst most would likely be reluctant to share names, they can tell you what types of borrowers they have helped. Different money lenders deal with different types of loans and varying amounts. You’ll want to piece as complete a picture as possible before you proceed.
- What is your loan-to-value ratio? – Lenders charge a lower loan-to-value ratio than the traditional loan. For example, if their value is 80%, they will give you $80,0000 for a $100,000 piece of property. Loan-to-value ratio, generally, hovers around 60-50%. You’ll want as high as possible so that you won’t have to look elsewhere to cover the rest.
- What Are the Terms? – Hard money loans are transacted in a far different way than conventional loans are. Many people don’t know that. Unfortunately, they sign the paperwork and are then overwhelmed. You can avoid that by making sure that you understand the terms of the agreement first. Hard money brokers will offer a variety of different lending programs. Many of them are flexible and customized to your situation. Some hard money lenders will ask you for a series of interest only payments followed by a large balloon payment. Others may waive your payment during difficulty and allow you to repay later. You need to look at the different terms and choose the ones that best fit your needs. For example, some hard money brokers will charge a prepayment penalty. If you are planning on refinancing this loan in the next year, then this loan would not be your best option. Ask your lender about his terms.
- Interest rate – Hard money lenders are notorious for their high interest rates which are double than that of conventional loans: 12 – 15% and three points on the mortgage, or more. But lenders vary and in a competitive market you may be able to find some comparatively reasonable rates. Ask your lender what his are. Some lenders can often be unscrupulous in their rates knowing that they may be the last resort for many clients. You may be able to lower the rate by negotiating. Most of these lenders are acting independently, and they choose their rate based on the amount of money that they want to earn. This means that if you negotiate (and mention that you are looking elsewhere), you may be able to lower your deal.
- What is your upfront payment? – Some money lenders waive their upfront payments, but many others commonly ask for as much as two prepayments. The amount of prepayments depend on the structure of the loan and can include a certain sum of advance interest and installment payments. The law demands that the lender can typically ask you for no more than two. If he or she exceeds this limit, look into the regulations to determine whether his request is reasonable. If not, you may be able to back out with no penalty to you.
- How Soon Will I Have the Money? – One of the pluses of hard money loans is that you can touch the money in fewer than ten days. Many lenders tend to sign the deals in the first 1-2 days. Some may hand it over to you the same day. Ask your broker how long it takes him to sign the deal. Most lenders work on their own schedule, therefore times vary from one lender to the next. Asking avoids confusion.
- Transparency – See and ask whether your lender is willing to have the patience to answer your questions. You can ask whatever you want regardless of whether you seem ‘stupid’. Review his website; does he have his guidelines there? Are they clear? Consistent? All gaps filled in? Would he be able to find any loophole for altering his contract? Does he abide by by his guidelines? Does he have any teaser rates? Can he explain them if he does, and will he tell you when they are applicable to you? Look at his social media sites: Is the message consistent? Does the lender seem professional? You would want to ask yourself these and similar questions to ensure that you have a comfortable and honest relationship.
Hard money loans are also called “personal loans” because, as lenders like to point out, this form of unconventional lending provides an environment of trust that traditional lending lacks. Not all lenders, however, deserve this trust, and some may let you down in others ways, too. I hope that the guidelines listed in this article help you make the best choice.