Understanding what hard money Loans are used for and how Commercial Hard Money Lenders determine the terms for the Loans is essential for all borrowers. This information helps you to understand why hard money carries a higher cost.
Commercial Hard Money Lenders are often referred to as nontraditional lenders. This term does not mean that they are operating outside of the law in any way. This entire term means is that these Loans are not from banks or mortgage companies, which are called traditional lenders. These are Loans from a person or small group of people who are in business to fund Loans. And because this is a for-profit business, there are fees and expenses that the borrower must pay.
Commercial Hard Money Lenders can determine their interest rate rather than having it set for them in the same way that banks and mortgage companies are regulated. In most cases, the lender will evaluate the loan application or request to determine how much risk is involved. They can then set the interest rate accordingly. It is not uncommon to see hard money interest rates as high as 10% to 20%. But borrowers are willing to pay the higher rate to get a loan that would never get funded by a traditional lender.
As with most Loans related to the purchase of property, the lender also charges the borrower points on the loan. Each point represents 1% of the loan value. Again, the lender is determining the points on the loan in accordance with the amount of risk he or she feels is involved in funding the loan. If the loan does not appear to be extraordinarily risky, then you could get a much better interest rate and pay fewer points on the loan. This is where your down payment can work in your favor. A very high down payment increases the instant equity in the property. It also greatly decreases the risk to the lender if you default on the loan.
Hard money lenders can charge many different fees. Because they are not scrutinized like banks and mortgage companies, many of these fees can have unique names. But they are all designed to put a little bit of money back in the lender’s hand at the time the loan is funded. Some fees can include a funding fee, an appraisal fee, a processing fee, and an origination fee. If a lender is charging a considerable application fee, be cautious. In most cases, legitimate hard money lenders do not charge hefty application fees. This charge is the one best indication of a scam.
While there are more substantial fees associated with hard money, you are getting a much higher level of service from a private lender. The payment schedule and other terms of the loan are all subject to negotiation with a private lender but not when working with a bank. In addition, private lenders are willing to lend to borrowers who have been turned down by banks and other lenders. If hard money is your only option, then it is worth paying more to get the loan that you need.
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About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.