Identifying a legitimate hard money loan broker/lender

[Jorge Normandia]

It has been brought to my attention lately that many so called hard money loan brokers request an upfront fee for their services. I felt compelled to right about the loan application process so you can understand it and avoid getting scammed. First of all, THERE ARE NO UPFRONT FEES. Brokers receive compensation for our work only IF your loan is approved. And we get paid by the lender, not the borrower (real estate investors in this case)

So, with that out of the way lets begin to understand the process of a hard money loan.

After identifying your investment opportunity and negotiating the purchase price, you will need to create a rehab cost analysis. After determining the rehab cost, and making a list of the repairs to be made, you can approach a hard money loan broker to begin your loan application process. The application has 3 stages;

Pre-approval

Most lenders will require that you fill out an application form, include with it documentation identifying the property, a credit check authorization, most HML will accept FICO scores of 600 and up, and proof of funds. At the end of this stage lenders will decide wether they are willing to lend to you or not.

Underwriting

If the lenders are willing to lend to you, they will pass to the underwriting stage. Lenders will look at the property that they will be lending on. For this, they send an appraiser to create a report on the property. Like any other loan where there is a property being used as collateral, the appraiser's fees will be charged to the borrower at the time the appraiser visits the property. For this, lenders will require that you fill out an authorization form allowing them to charge your card for the amount of the appraiser's fee. Be very vigilant with this form, the form HAS to inform you of the amount that is going to be charge and be sure that it is a reasonable fee for an appraiser. Once the lender receives the appraiser's report and property title and determining the property's ARV (after repair value) if that would be the case, they will determine if they are willing to lend on the property.

A little hint: The way you increase your probabilities of being approved is simple. If the property is a good deal, money wise, but comparable homes in the same area have been on the market for over a year and their asking price is below appraised value you will not be approved.

Private lenders (or hard money lenders) look at the property thinking what would happen if you default on the loan. How can they turn the property into cash, how fast can they do it and how much will it cost them to market the property. So it is good practice that you perform this analysis before hand. If you determine that the property can be sold in a few months, can't tell how many months exactly since each lender has a different criteria, and the property can be sold for the appraised value or more then yes the property is a good deal and you have great probability of being approved.

Once the underwriting is done we move to the final stage, Closing

At this point you have been already notify of the loan approval as well as the terms of the loan. You will be notify of how much money you need to have for the down payment and the amount of the closing costs, closing cost are present as points which are equal to percentage. So if the lender charges 3 points for closing cost that means you have to pay 3% of the total loan amount. The closing cost is an additional charge and is not included in the down payment. Hard money loans usually go from 12 to 18 months and interest rates start around 9% and up. Most lenders do offer to extent the length of the loan to up to 24 months but they charge an additional fee for this extension since it represents an additional risk for them. If you agree with the terms provided to you then a closing date is set. At closing you will make the down payment and pay the closing costs and you will be funded.

The whole process may take between 10 to 30 days depending on the lender. So that is it, no up front fees except for the appraiser's fee. I hope this helps you understand the process. So next time you look for a PML (private money lender) or broker be sure they present to you a great deal and a transparent process.