As if the mortgage industry hasn’t endured enough over the last 15 years, the current climate of the Los Angeles real estate lending continues to cause concern among borrowers. Hard money lenders, for example, provide an incredible service to market investors, but without properly verifying a lender’s credentials, one can easily learn that not all lenders have their best interest in mind.
To help keep borrowers informed about some of the less-than-ethical issues arising in the hard money sector, we have compiled a list of some key considerations that MUST be made before settling on a lending house.
In today’s business world, anyone can build a website, print some business cards, and “open shop”. Unfortunately, this leads to a higher frequency of predatory loans and scams. In southern California alone, several hard money lenders and private capital investors have been petitioning real estate investors, promising capital for investment opportunities, despite not having the necessary licenses to do so.
Before choosing hard money lenders, always be sure to check your state’s applicable bureau for license information. If the lender cannot produce a license number, move on to the next offer. While they may have offered you a very enticing offer, there’s usually a catch – more times than not, it’s that they are doing so illegally!
Predatory Lending Practices – Check the Fine Print!
Many borrowers in Los Angeles, particularly the elderly, are receiving offers for home loans that tout “no payments for 12 months”. These loans are quite attractive at first, as they obviously give the homeowner a “grace period” to move in, make upgrades to the property, et cetera. However, what the lender conveniently fails to mention is that once the grade period is over, the payments are astronomical. The borrowers then struggle to make the necessary payments, and within months, are turning their property over to the lender.
Avoiding this eventuality is easy, but it requires the ability to see past the attractiveness of one year without payment and really dive into the REALITY of the loan. Can you afford to make the payments once they resume? Is the “interest meter” running during this grace period? Ask these questions and demand legitimate answers. If your loan broker seems “dodgy” about answering them, it’s probably in your best interest to find another lender.
Do you REALLY Quality? Be Honest with Yourself…
Over qualification of loans has run rampant in the hard money real estate industry. After all, a quick glance at the government lawsuits being levied against all of the large banking chains will uncover just how prevalent over qualifying practices have been in the last decade. The hard money industry is no different!
The strategy works like this:
A lender offers you a loan to get a home. The hard money mortgage seems a bit out of your range, but you are so excited about finally owning your own home that you believe the lending agent when they say “We’ve looked over your finances, and you can DEFINITELY afford this property.” Why wouldn’t you believe it? After all, it’s exactly what you wanted to hear, right?
So, the paperwork is signed and the home is now yours. Everything is good, right? Wrong.
What you didn’t know is that the lending agent KNEW that you couldn’t afford the home, which is exactly why they extended the offer. They wait for you to realize that you cannot pay the hard money loan off in the 12 month term outlined in the agreement, and you now must turn the property over to them.
This technique is despicable, but it happens. Be sure that you get all of the financial facts before agreeing to a hard money mortgage arrangement!
While this information can be startling, it’s important that real estate investors and borrowers understand the truth about the hard money lending industry. These loans types can be an INCREDIBLE way to access capital to make moves in the marketplace, but if, and only if, they are utilized properly.
Before signing your name to a hard money loan, be sure to refer to this list. Ask the difficult questions – if you don’t get reasonable answers, walk away!