Applying for a hard money loan for the first time can be overwhelming for some borrowers. Fielding questions from a hard money lender can be intimidating, especially when the borrower has no experience with these types of loans. Below are 10 important questions to ask a hard money lender to ensure they are a legitimate lender can deliver what they promise and won't try to add any extra fees to the loan.
If you aren't satisfied with the answers from these questions you may need to keep looking for different hard money lender.
1. How much experience do you have in hard money lending?
Make sure the lender has sufficient experience in hard money lending and with the type of hard money loan you are requesting. The more experience the hard money lender has, the better.
It’s in the best interest of the lender for their borrowers succeed. Borrowers can from leveraging the lender's experience to avoid any potential problems.
2. What is your real estate license ID?
Ensure that hard money lender is fully licensed. Their license ID should be displayed on any advertising material they produce and their website. The license ID can be used to search on the state website, which reveals additional information about the licensee. In California, a real estate broker’s license ID can be checked here: CalBRE Public License Lookup
3. Are you a direct hard money lender or will you broker this loan to another company?
A direct hard money lender processes the entire loan and funds it with their internal resources. Lenders who only brokers loans send the request to another lender to fund.
A loan with a direct hard money lender will fund much faster, but in some instances brokering a loan to another lender will result in a lower cost loan for the borrower. The lender may know of a specific lender who can fund the loan for a lower cost.
Either option may work for the borrower but the borrower should know what type of situation is being proposed by the lender upfront.
4. Do you have references from previous borrowers?
Experienced hard money lenders should be to point to positive online reviews and testimonials from satisfied clients. The hard money lender might have reviews on a 3rd party website or have client comments on their own website. If the lender doesn’t have clients with great things to say about them there could be issue.
5. What is your interest rate and how many points do you charge?
The interest rate and points are usually the two main factors that determine the cost of the loan. After interviewing with few lenders, the borrower should have an idea of the range of rates available.
While the loan cost is usually the main determinant in selecting which hard money lender to use, reliability and experience need to be strongly considered.
6. Are there any other fees that will be charged for originating the hard money loan?
Some lenders may quote interest rates and points and later inform the borrower of other processing fees. Ask about all fees upfront and factor them into the total loan cost for a fair comparison between lenders.
Transaction fees such as escrow, title insurance, recording and notary fees apply for all loans but these are not paid to the hard money lender.
7. What loan to value you are able to offer?
The loan to value ratio (LTV) is the loan amount the lender allows based on the value of the property. This ratio may vary from lender to lender. The LTV may also vary due to the property type. Commercial property generally has a lower LTV than residential property. LTVs on land are the lowest due to the high risk involved. Rural properties also have lower LTVs.
Hard money lenders who will take on a great deal of risk may lend on the after repair value (ARV).
8. Is there a prepayment penalty?
It’s not uncommon for hard money lenders to a prepayment penalty (PPP) which means a minimum amount of interest must be paid. For many situations the PPP will not affect the borrower. If there is a PPP, the borrower must ensure it works for their timeline.
The borrower may be able to negotiate or pay higher interest or points to change the prepayment penalty in some situations. Consumer owner occupied loans are not allowed to have prepayment penalties.
9. How long will it take to fund the loan?
Direct Hard money lenders should be able to approve and fund non-owner occupied hard money loan in 1-2 weeks. Reliable direct hard money lenders can fund hard money loans within 3-5 days in some cases if the funding is necessary to save a deal.
If the loan is a consumer loan where the proceeds are for personal, family or household use, the minimum time to fund the loan will be approximately 3 weeks due to government regulations and disclosure requirements. The loan process will be even longer if the consumer loan is against an owner occupied property.
10. How long of a loan term is available?
The borrower must make sure their timeline will work with the lender’s loan terms. Usually terms of 1 to 5 years are available but some lenders may only offer 1 to 2 year terms. Hard money loans are generally for short term use only.
Full article with additional information and questions available here: 10 Questions You Must Ask a Hard Money Lender When Applying for a Loan
