Vetting Hard Money Lenders

[Alicia Waldman]

Hello All,

I'm new to BP and am using this site as source to educate myself about REI. My strategy is to rehab, buy and hold. I've found a few companies that offer 5 year interest only rental property programs. And I've learned a lot in the forums about what these lenders will expect from me especially since I'm new. However, I can't find concise information on what I should expect from them. Is there a basic set of questions I should ask them? Are there key words that I should listen out for? What is the best way for me to vet a reputable firm? Thanks!

[Don Konipol]

@Alicia Waldman , first, you need to determine if the lender is a direct lender, indirect lender, or a mortgage broker. Obviously, dealing with a direct lender eliminates the "miscommunications" possible in dealing with a third party intermediary. However, good mortgage brokers have contacts with a number of direct lenders and can therefore provide "one stop shopping" for the most appropriate financing.

Before getting serious about financing, you need to determine what characteristics of the loan are most important to you. For example, some property investors use a quick close to help negotiate a low price; to these borrowers the ability to make a decision quickly and fund quickly is of paramount importance, so that they will pay higher interest rates and fees in exchange for speed. To investors with poor personal credit the most important financing criteria is loans based on the asset itself rather than credit; these investors are candidates for so called hard money loans. Investors seeking financing for properties they intend to hold long term purchased at fair market price will usually seek the lowest interest rate and/or lowest fees - provided they have 25 or 30% down payment money available. If they have little in the way of a down payment, they will have to find a lender that lends on APPRAISED value rather than on purchase price - and pay significantly higher interest rate and fees.

Once you have determined the loan characteristics most important to you, you will have to choose whether to use the services of a mortgage broker or go directly to a lender. Finding a good mortgage broker will save a large amount of time, and also expose you to lenders that work exclusively through mortgage brokers and don't deal directly with investors. Dealing with a bad mortgage broker will often result in getting a loan not fitting your criteria, or paying way too much for the loan, or worst of all being strung along and losing the property under contract by not being able to perform.

You need to do due diligence on any mortgage broker or lender you are dealing with. Past references are best - check them out just as you would when hiring a nanny for your children or a contractor to improve your house. Also, having predetermined what is important to you in a loan - speed, low down payment, no credit check, or low interest rate/fees will enable you to concentrate on the lenders and brokers that deal in those types of loans.

One important caveat - If you have 25% down payment money available, a credit score of 720+ and the time to close, you will be able to score a long term low interest rate loan that will allow for a positive cash flow on a large number of investment properties. If you are lacking in one or more of these areas, finding a property that will allow a positive cash flow will be a lot harder as fewer properties will be able to qualify. In this scenario many investors turn to properties attractive to low income tenants - sometimes very profitable but always a managerial headache and often a managerial nightmare.