Hard Money Lenders

[Daniel O.]

How does a commitment letter written by a hard money lender work? if a hard money lender writes a commitment letter for $180,000 will this be the total amount loaned? will it be cash given to the buyer or directly handed to the seller?? Im new to this so any and all information will be a ton of help! thanks everybody!!!

[Don Konipol]

A commitment letter, or a proof of funds letter, when not deal specific from a hard money lender is virtually worthless. All it says is that if you bring a deal that's to their liking, they will consider funding it. The confusion is a result of mistaking this letter with a pre approval letter from a credit based lending institution. The latter indicates that your credit is good enough for them to issue a loan of a certain amount under specific terms. Since the hard money industry is not credit driven, many hard money lenders will finance just about anyone if the deal is good enough (i.e., low LTV, cash flow, significant cash investment by borrower).

In fact, a few years back a number of residential hard money lenders had downloadable preprinted proof of funds letters on their websites; you merely filled in your name and presto - proof of funds! Of course institutional sellers caught on quickly and these became worthless.

I often get inquiries from investors, usually new to real estate, wanting to know what they have to do to get "qualified". The answer is that there is no answer. This is more true with commercial properties. Each loan request is looked at individually. Many people incorrectly believe that the distinguishing characteristic of hard money or private money loans is higher interest rate and fees - this is actually the cost - the distinguishing characteristic is that these are loans which are evaluated using the knowledge, experience, risk tolerance, funds supply of the lender rather than a mathematical formula score.