Hard money loans are wonderful but they can also be risky. You pay double interest and the news regularly carries details of unscrupulous lenders. Here’s what you need to look into to avoid being cheated:
The terms – Lenders make their own terms. Many tend to charge a series of interest-only repayments spaced out by payments-only, finally followed by one large balloon payment at the end. The balloon payment is what you have to worry about. Here’s where you have to pay a substantial sum to repay the debt. If you’re not disciplined, you can find yourself in default. The FDIC created Law 6500 on Consumer Protection to protect borrowers who find themselves in such situations. It restricts balloon loans so that they cannot mature in less than 5 years. In some cases, balloon loans will be banned. Make sure that your lender follows these requirements before you agree to accept any loan.
Negative amortization – Negative amortization also means an endless loop of debt which means that you either lose your property and/ or become ill as a result. (Too many times, unfortunately, both). The interest is higher than your payments so however much payment you make you never succeed in paying the debt and are always owing more. This is not to be confused with an upside-down loan, which occurs when the value of the collateral drops below the value of the loan. Upside-down loans happen as a result of market (and other) conditions. A negative amortization is independent of market factors. Look into the reputation of your lender before you sign anything. Better still, hire an attorney to look over the forms before you complete the transaction.
Predatory lending – One of the pluses of hard money lenders is that they lend you money even if you have low credit rating and a history of bankruptcy or foreclosures. But lenders have to review your history and see whether you are capable of repaying. Consumer laws demand that lenders only borrow to those who are able to repay and that the borrower has to understand all the terms and conditions before agreeing to any transaction. Always ask to see the calculations first and ask for a few days to review before you sign. Loans can be rendered unlawful if you get a ‘no credit check’ hard money issuance, but it can also get you into a lot of expense and stress before you figure that out.
Up-front payments – Some money lenders waive upfront payments, but many others commonly ask for as many as two upfront payments. These 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 can back out with no penalty to you.
His credibility – Lenders have to be certified to deal with their states. Each lender, too, dabbles with particular loans and certain clients. Look into their lending history and determine their honesty and reliability. Ask them which type of clients they have served, the type of loans that they have processed, how long they have been working, and inquire into their credentials. Also ask them where they get the money to finance their loans. Some get it from personal funds; others from mortgage funds.
Transparency – You should be able to have web-based access to all loan data during the origination process. You should also be able to ask your lender whatever questions you wish (regardless of how ‘stupid’ it sounds), and your lender should show you all his calculations. The lender’s website should show his guidelines and these guidelines should be scrupulously followed with none added or altered later on. If your lender has “teaser” rates, ask how to get those rates. Don’t let him “bait and switch” you into paying higher rates and point categories without understanding why those “teaser” rates don’t apply.
Reliability – Timing and eligibility can break your deal. Make sure he keeps his promises.
Professional – The hard money lender should tell you right away if he cannot service you. He should also explain why. It may be that he cannot meet your loan type or amount. He should publish his loan programs, carry honest and transparent advertising and follow through on his terms. Check the website and his social media sites – whether they be Facebook, LinkedIn, and/ or Twitter – and maybe others; see whether his profile and promises on these sites are consistent and professional throughout.
The short of it is this..
Hard money loans are risky. You’re putting your property on the line, so you’ll need to work all the harder to make sure that your broker serves you not his pocket. Some of the things to look into are his credibility, his experience, his professionalism, his reliability, how fast he produces that loan, and his consistency. Also review his terms, beware of predatory lending, any negative amortization, and keep tags on your upfront payments. You’ll want to become the hero. Don’t let him pull you down!