Written by Grace Widdicombe
New hard money borrowers may be intimidated when inquiring about a hard money loan for real estate, and therefore let the lender dictate the conversation. Arm yourself with these 10 questions before the interview. This will help avoid getting into a bad situation with a hard money lender who isn’t able to deliver what you need or adds extra junk fees to the loan at the last minute.
Top 10 Questions to ask Hard Money Lenders
1) Are you a direct lender, or will you broker this loan to another company?
A direct hard money lender will process the entire loan and fund the loan with internal resources. These lenders are often titled Private Money Lenders. A loan through a private money lender will often be faster and smoother, but in some situations a lender who brokers to another company can save you money in lower loan costs.
A hard money lender may know of a specific funding source that will be cheaper for the specific loan scenario or may know another lender who specializes in financing certain requests other lenders won’t fund.
2) Do you have references from previous borrowers?
The lender should have no problem pointing you to a plethora of borrowers if the clients were satisfied with the service.
Don’t rely on website postings testimonials, whether you see them on 3rd party websites or the business websites.
3) What is your interest rate and how many points do you charge?
Interest rate and points are generally the two factors that determine the overall cost of the loan. After speaking with a few lenders, you should have a good sense of the range of rates currently available.
It’s common for borrowers to only focus on the cost of the money, but there are other pain factors that can occur during the course of the transaction, and the loan period. Please read on.
4) What are the originating fees for the hard money loan?
Some hard money lenders will quote interest rates and points and then conveniently wait to inform the borrower of their document fee, their credit check fee, their set-up fee, and more.
Ask about all fees upfront and factor them into the total cost of the loan for a fair cost comparison between lenders.
Side note: There are other transaction fees, such as escrow, title insurance, recording and notary fees. These fees are not paid to the lender, but to other people you hire for the closing, and the county courthouse.
5) What loan to value are you able to offer?
The loan to value ratio (LTV) is the loan amount the lender will allow based on the current value of the property. This ration will vary from lender to lender. The LTV will also vary based on the property type. LTVs on commercial property loans are generally lower than residential property (Meaning you’ll get less money from the lender.) LTVs on land are often the lowest because of the high amount of risk involved, as such rural properties will also have a lower LTV.
I look for lenders with an appetite for risk, who will lend on the after-repair value (ARV) as oppose to more conservative loan based on the current value, or purchase price.
6) Is there a prepayment penalty?
It’s not uncommon for lenders to have a prepayment penalty which means a stated amount of interest must be paid on the loan before you pay it off. If there is a prepayment penalty, you should make sure that it works for your proposed timeline.
If it’s not in your favor, you might be able to negotiate and pay a higher interest rate or another point to get rid of the prepayment penalty. (Note: prepayment penalties are illegal on owner occupied loans.)
7) How long will it take to fund the loan?
Hard money lenders should be able to approve and fund such a loan within 2 weeks. I have obtained funding in less than 3 days from my trusted and reliable hard money lenders. Their quick turn-around on the loan saved the deal. Otherwise I am happy to give the lender more time and be cooperative as a borrower.
Turnaround time on other kinds of loans will have to will take longer to process due to government regulations and disclosure requirements.
8) How long of a loan term is available?
Hard money loans are normally for short term use only. In general, terms of 6 months to 5 years are available, but some lenders may only offer you a loan term on the shorter side. You should make sure your timeline will work with the lender’s terms.
Along this line, ask how much will it cost to extend the term if you don’t get it sold in time.
9) Are rehab costs for a fix and flip project covered?
In many cases a fix and flip investor will need a loan to not only purchase the property, but also to get funding for the rehab costs. Some hard money lenders will only provide a loan to purchase the property and require the borrower to have additional funds to cover the rehab costs, while other lenders are able to provide financing for all or a portion of the rehab costs.
You should talk about the rehab costs and loan before you go to all the work of completing the loan application process. The lender will also be influenced by their loan to value policy.
10) Do you lend on residential owner-occupied properties?
If you want to live in the property you need to make sure the hard money lender will be okay with that. The majority of hard money lenders will not lend on residential owner-occupied properties. The recent regulations (Dodd-Frank Act) have made the process much more difficult for both the borrower and the lender.
This kind of loan is not in the wheel house of most hard money lenders, due to the Dodd Frank restrictions.