Visitors to this site come up with all sorts of different ideas when they think of what a hard money lender is. Some, don’t see this service as being much different than a normal mortgage lender or traditional bank. Others think of loan brokers as someone who’s looking to charge a huge amount of interest for a lump sum of cash. At any rate, private loan companies allow you to get a specialized type of loan with much less underwriting and loan processing.
The reality is somewhere in the middle. Yes, most private lenders will charge high interest rates. The trade-off though is that you can apply with a bad credit score. The amount of documents required by underwriting and the time it takes to get approved is limited. The entire process from start to finish is much easier than what you would see with a typical mortgage lender or bank financing department. It’s critical to do your homework when searching for the company that best fits your borrowing needs. Find out what states your lender is registered in and make sure they have all the appropriate state and federal licenses. For example what is their NMLS or Nationwide Multistate Licensing System number? Ensure your firm is licensed by your individual state regulator. For example, in California it would be the DBO or the Department of Real Estate. In Florida, they would need to be a licensed Florida Mortgage Lender.
Most private money lenders offer short term loans which can also be viewed as bridge loans. With this type of financing an online lender provides funding based on the collateral for the loan. In other words, someone will give you a loan based on the value of your building, warehouse, or lender-occupied dwelling. It often will qualify as long as it is some form of real estate. Of course these rates and finance charges at a higher interest rate than what you see from a typical online financial company. Most private money deals are usually non-conforming to bank requirements. Hard money lenders will provide a range of deals based on the loan-to-value percentage. Consider the type of real estate backing up the deal and the minimum loan size when looking at closing costs. These loans are more expensive but often the only type the client can receive. They are not based on the regular credit score requirements or real estate underwriting standards. So the low-end customers with not much collateral can be considered for online financing for something like a rehab loan. The borrower does not even have to prove his/her income or address. So now we have a reason for the high expenses and the lack of bank or mortgage lender underwriting.
There is a very high rate of default on hard money loans associated with a residential property. We know this is one of the reasons for the higher interest rates and closing costs. Both individuals and small companies will resort to this form of borrowing for various reasons. Some because they lack the credit history or past bankruptcy. The credit rating or other documents which would make a bank loan much more promising are no longer an issue with private money lending. But collateral for residential property is based on the size of the loan. Most financing amounts and down payments will vary due to the final loan amount. You can expect to qualify with a high interest rate if you agree to a long-term repayment schedule. Is there a larger amount needed upfront for collateral? Once you get to this step you’ll have a good idea of what you can bring to the table. Now is the time to use our online directory of private money loan companies. You should be able to settle on a company that is reputable and checks all the boxes for what you’re looking for.
Private money lenders may serve a small state area or offer loans on a national basis. They have area brokers who take a percentage of the loan, called points, which adds to the cost of the loan. They take care of the paperwork and meeting with the applicants in the early stages. Hard money lenders can be for individuals or for commercial usage. You can also look into using a private lender for financing options like 2nd trust deeds, fix and flip and bridge loans. Commercial Hard Money Lenders are the ones to go to for commercial loans. But they can access collateral out on the commercial as well as your own real estate, your home. Thus there is a risk of foreclosure or losing your primary real estate. Some states do not allow high interest loan companies. We cannot afford any more foreclosures in California. More companies are lending money on little or no credit. We acknowledge that hard money lenders need to be more strictly monitored. For every foreclosure or default, 50 people and their livelihoods are affected. It is a ripple effect we let things get too much out of control.