Your hard money lending situation somewhat reminds me of a Goliath vs. David encounter where you are the puny David facing the know-it-all seemingly omnipotent Goliath – namely hard money lender. In this way: Hard money lenders are typically savvy, highly skilled awfully knowledgeable individuals. They know how to get the cream of the crop and the carrot of the deal. And you may know relatively little. To get good terms, you’ll need to know their lingo, play their game and tackle the ins and outs of hard money loan deals.
For starters, here’s a rundown of the fees that you’ll almost certainly be paying:
Points – Paid by you as part of your closing costs.
Underwriting or Other Fees – Paid by you as part of your closing costs.
Referral Fees – Paid by your lender to another hard money lender for referred business. (You could pay, as part of your closing costs, if your lender owes a referral fee for your business.)
Loan Servicing – Paid by the private investor to the hard money lending company, if the hard money loan is serviced by the company.
Late Fees – Paid by you if your payment is not made on time.
Default Interest – An increased interest rate if there is a breach of the hard money loan terms.
Foreclosure Fees – Added to the balance of your loan.
Renewal Fees – Paid by you to renew the loan for an additional term. Hard money lenders invest their own money. To that end, they’ll want to get as much ‘buck for their deal’ as possible. The field has become more regulated but there is still plenty of room for hard money lenders to move about and personalize their terms. They earn through their interest – and they post more through their fees. It will help you to understand these fees for you to strike the best rate and terms for your deal.
Hard Money Loans – Fee Income
Points – Points are simply a 1% of the loan amount so if the lender funds you 10000, he’ll deduct $100 as ‘point’. A hard money lender may add points in addition to or exclusive to the underwriting or other fees. Whether or not he does so depends on the transaction, agreements between all parties, loan-to-value (LTV), risk and complexity. Sometimes, the hard money lender may share your points as ‘referral fee’ to a third party who referred you or to a private investor who is involved in this transaction.
The distribution of the points paid up front might look like this:
-$8,000 to the hard money lender
-$3,000 to the referring hard money broker
-$4,000 to the private investor to increase his or her yield
Underwriting or other fees – These are the fees of the process that include filling out the forms and the amount of time and expense that lender invests in investigating your credit, work history, value of building and so forth. Some hard money lenders include these fees. Others replace them with your points.
These fees include:
Underwriting Fee – A flat dollar fee, typically between $750 and $2,500 will be
charged on hard money loans, depending on the complexity. Sometimes this fee is
incorporated into the points, but may be a separate additional charge.
Processing Fee – A flat dollar fee charged for the processing of the loan.
Doc Prep Fee – A flat dollar fee charged for the preparation of the loan documents. Sometimes, these fees will be passed through because the hard money lender is using a private company to generate the documents, and sometimes this fee will just be additional income to the PML.
The hard money lender usually covers the appraisal and credit report fees.
Late Fee Income – These are charged if the borrower exceeds the date for repayment that is specified in the promissory note. The loan servicer usually splits this late income fee with the investor 50/50. The fine is paid when you pay the fee.
Foreclosure Fees – Some hard money lending companies also provide in-house foreclosure services in which case you’ll likely end up forking out more money for this service. Others outsource all foreclosure services in which case they forgo sharing the foreclosure fee revenue.
Typically, this income is not shared with private investors.
Renewal Fees – Here’s where you and lender are mutually satisfied. You’ve repaid your loan, it’s helped you and you plan on another cycle. The lender will typically ask for a renewal fee which involves a certain sum of money to be paid upfront or added to the principal of the loan.
The payment process typically occurs in the following way: A maximum two prepayments of a certain sum. Government regulations prohibit exceeding that sum. Monthly payments of interest followed by a large balloon payment at the end of the loan term.
Payment structures and terms depend upon each lender. Some are more flexible than others and allow you to forego a month (to be made up later of course), if you run into difficulties. It may help you to consider that each is a ‘private’ investor as opposed to a government-regulated body. This means that their fees are negotiable and open to reduction – especially since they want you as much as you want them!
In the end, strong collateral, low LTV and excellent track record will improve your position to negotiate a lower overall cost for the loan.