Hard money lenders are just another type of mortgage broker–or are they? Well, yes and no. Following are a few ways in which hard money lenders are actually very different from regular mortgage brokers–and what that can mean for real estate investors.
Private lenders vs. institutions
Regular mortgage brokers work with a number of institutions such as big banks and mortgage companies to arrange mortgages, and make their money on points and certain loan fees. The bank itself tacks on more closing costs and fees, so by the time the closing is over, the borrower has paid anywhere from a few thousand to several thousand dollars in fees, points and other expenses. And the more mortgage brokers are involved, the more points the borrower pays.
Hard money lenders, on the other hand, work directly with private lenders, either individually or as a pool. If the hard money lender works with the private lenders individually, then for each new loan request, the hard money lender must approach each private lender until s/he has raised enough money to fund the loan. The money is then put into escrow until the closing.
Alternatively, instead of approaching private lenders individually for each new loan, the hard money lender may place private money from the private lenders into a pool–with specific criteria about how the money can be used. The hard money lender then uses predetermined terms to decide which new loan requests fit those criteria. The loan servicing company that collects the loan payments pays them directly into the pool, and the pool pays a percentage of those payments back to the private lenders.
Different types of properties–investment vs. owner-occupied
While regular mortgage brokers can work with residential properties or commercial properties, hard money lenders vastly prefer investment properties–also known as “non-owner-occupied” properties (NOO for short). That’s because “owner-occupied” (OO) properties have restrictions on how many points the hard money lender can collect (ex. a maximum of 5 points), and the term must be at least 5 years.
With NOO properties, hard money lenders can charge higher points and fees and offer loans for shorter terms, sometimes even one year or less. While that may seem risky and expensive, the profit from one good “flip” transaction can easily make up for higher loan expenses.
Knowledge of predatory lending laws
Owner-occupied (OO) real estate properties are subject to what are known as predatory lending laws–a set of laws designed to protect consumers, especially the under-educated, minorities and the poor–from unscrupulous and unfair lending practices.
Hard money lenders must be fully knowledgeable of both federal and state predatory lending laws. And private lenders will only work with hard money lenders, because a regular mortgage broker usually is not familiar with predatory lending laws and may make a mistake that gets his license suspended–and may even jeopardize the private lender’s loan.
Saving money with hard money lenders
Now that we’ve discussed some of the differences between hard money lenders and conventional mortgage brokers, you can see some of the reasons for using hard money loans for investment properties that you intend to flip or rehab and resell. Here’s another reason: by dealing with a hard money lender who has direct access to private lenders (rather than several layers of brokers), you may be saving yourself thousands of dollars in points and extra fees.
Furthermore, using a hard money lender can help you quickly obtain the loan you need, with the term you want, and with no risk to your personal credit. And if you can develop the right kind of relationship with the right hard money lender and private lenders, you too can be part of the “inner circle” of real estate investors who seem to find out about all the best deals first–and are building real wealth. licensed moneylender