Hard cash lenders are just another sort of mortgage brokerâ€"or are they? Well, maybe. Following are 1 or 2 ways in which hard money banks are essentially absolutely different from regular mortgage brokersâ€"and what that will mean for investors in real estate.
Private lenders vs. Institutions
Regular financial consultants work with numerous establishments such as large banks and mortgage corporations to arrange mortgages, and make their cash on points and certain loan costs. The bank itself tacks on more closing costs and fees, so when the closing is over, the borrower has paid anywhere from a couple of thousand to several thousand dollars in fees, points and other costs. And the more mortgage consultants are involved, the more points the borrower pays.
Hard cash lenders, on the other hand, work directly with private lenders, either individually or as a pool. If the hard money lender works alongside the non-public lenders individually, then for every new loan application, the hard bank must approach each non-public lender until s/he has raised enough money to fund the loan. The cash is then put into escrow till the closing.
Or, rather than approaching non-public lenders individually for every new loan, the hard money lender may place personal money from the non-public lenders into a poolâ€"with precise standards about how the money can be used. The hard money lender then uses predetermined terms to choose which new loan requests fit those standards. The loan servicing company that collects the loan payments pays them directly into the pool, and the pool pays a proportion of those payments back to the private banks.
Differing types of propertiesâ€"investment versus. Owner-occupied
While regular mortgage consultants can work with residential properties or commercial properties, hard money lenders hugely like investment propertiesâ€"also known as "non-owner-occupied" properties (NOO for short). That's because "owner-occupied" (OO) properties have limitations on how many points the hard funds provider can collect (ex. Up to 5 points), and the term must be at least 5 years.
With NOO properties, hard cash lenders can charge higher points and fees and offer loans for shorter terms, often even one year or less. While that may appear dangerous and dear, the profit from one good "flip" transaction can simply make up for higher loan expenses.
Awareness of rapacious lending laws
Owner-occupied (OO) real-estate properties are subject to what are known as unscrupulous lending lawsâ€"a set of laws built to protect customers, particularly the under-educated, minorities and the poorâ€"from unscrupulous and prejudiced lending practices.
Hard cash banks must be completely well informed of both Fed. and state predatory lending laws. And non-public lenders will only work with hard money banks, because a regular mortgage broker often isn't conversant with inequitable lending laws and may make a howler that gets his license suspendedâ€"and may even jeopardize the personal lender's loan.
Saving cash with licensed money lenders
Now that we've discussed some of the variances between hard money lenders and typical mortgage consultants, you can see some of the reasons for using hard money loans for investment properties that you intend to flip or rehabilitation and resell. Here's another reason: by dealing with a hard money lender who has immediate accessibility to non-public banks (rather than one or two layers of brokers), you may be saving yourself thousands of dollars in points and additional fees.
Furthermore, using a hard funds provider will help you quickly obtain the loan you need, with the term you want, and with no risk to your private credit. And if you can develop the right kind of relationship with the right hard money lender and private banks, you can also join the "inner circle" of real estate investors who appear to learn about all the best deals firstâ€"and are building real wealth.
Private lenders vs. Institutions
Regular financial consultants work with numerous establishments such as large banks and mortgage corporations to arrange mortgages, and make their cash on points and certain loan costs. The bank itself tacks on more closing costs and fees, so when the closing is over, the borrower has paid anywhere from a couple of thousand to several thousand dollars in fees, points and other costs. And the more mortgage consultants are involved, the more points the borrower pays.
Hard cash lenders, on the other hand, work directly with private lenders, either individually or as a pool. If the hard money lender works alongside the non-public lenders individually, then for every new loan application, the hard bank must approach each non-public lender until s/he has raised enough money to fund the loan. The cash is then put into escrow till the closing.
Or, rather than approaching non-public lenders individually for every new loan, the hard money lender may place personal money from the non-public lenders into a poolâ€"with precise standards about how the money can be used. The hard money lender then uses predetermined terms to choose which new loan requests fit those standards. The loan servicing company that collects the loan payments pays them directly into the pool, and the pool pays a proportion of those payments back to the private banks.
Differing types of propertiesâ€"investment versus. Owner-occupied
While regular mortgage consultants can work with residential properties or commercial properties, hard money lenders hugely like investment propertiesâ€"also known as "non-owner-occupied" properties (NOO for short). That's because "owner-occupied" (OO) properties have limitations on how many points the hard funds provider can collect (ex. Up to 5 points), and the term must be at least 5 years.
With NOO properties, hard cash lenders can charge higher points and fees and offer loans for shorter terms, often even one year or less. While that may appear dangerous and dear, the profit from one good "flip" transaction can simply make up for higher loan expenses.
Awareness of rapacious lending laws
Owner-occupied (OO) real-estate properties are subject to what are known as unscrupulous lending lawsâ€"a set of laws built to protect customers, particularly the under-educated, minorities and the poorâ€"from unscrupulous and prejudiced lending practices.
Hard cash banks must be completely well informed of both Fed. and state predatory lending laws. And non-public lenders will only work with hard money banks, because a regular mortgage broker often isn't conversant with inequitable lending laws and may make a howler that gets his license suspendedâ€"and may even jeopardize the personal lender's loan.
Saving cash with licensed money lenders
Now that we've discussed some of the variances between hard money lenders and typical mortgage consultants, you can see some of the reasons for using hard money loans for investment properties that you intend to flip or rehabilitation and resell. Here's another reason: by dealing with a hard money lender who has immediate accessibility to non-public banks (rather than one or two layers of brokers), you may be saving yourself thousands of dollars in points and additional fees.
Furthermore, using a hard funds provider will help you quickly obtain the loan you need, with the term you want, and with no risk to your private credit. And if you can develop the right kind of relationship with the right hard money lender and private banks, you can also join the "inner circle" of real estate investors who appear to learn about all the best deals firstâ€"and are building real wealth.
About the Author:
D. Dhar is a business writer focusing on personalloan and credit products and has written prominent articles on the finance industry. She has done her masters in Business Administration and is currently aiding as a singapore loans consultant.
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