Many brokers seem perplexed about hard money and when it is most appropriate for their borrowers. To fully understand and utilize a hard money loan, it is critical to know what hard money is, the difference between hard money and traditional lending, when a hard money loan is appropriate for clients, and understand common pitfalls associated with brokering a hard money loan.
What is hard money?
The definition of ?hard money? in real estate financing is essentially a non-bankable loan. Lenders are essentially loaning on the borrower?s ?hard assets?. The name hard money is frequently interchanged with ?no-doc?, private loans, bridge loans, etc. Hard money loans close quickly with little documentation.
Hard Money verses traditional lending
Traditional loans from banking institutions rely heavily on the borrower?s income, credit, tax returns, etc. as opposed to hard money?s primary reliance on the hard real estate asset. Along with requiring substantially more documentation, conventional lenders have minimum credit scores (typically high 600 FICO and above) as opposed to hard money loans that are underwritten on the collateral as opposed to the borrower?s credit (Fairview Lending has closed loans with FICO scores in the low 400s). Along with different underwriting standards, loans on conventional commercial loans can take months to close; whereas hard money commercial loans close much quicker. The final important differentiator between hard money and conventional financing is the interest rate. Since there is more risk in a true collateral based loan, the interest rates are higher than on a conventional mortgage.
When is a hard money loan appropriate?
There are numerous circumstances where a hard money loan is the best option for a client. Many times hard money is the only option available to borrowers due to the circumstances outlined below.
1. Borrowers with impaired credit
2. Tax liens/judgments/unpaid utility bills, etc.
3. Unable to fully document income
4. Partner buyout
5. Business turnaround/working capital
6. Owner-occupied properties
7. Time constrained borrowers
8. Foreclosure avoidance
9. Foreign Nationals
10. Complex loans with multiple pieces of collateral
Key tips for mortgage brokers
Hard money commercial lending is very different than conventional commercial lending. The hard money commercial lending arena is lightly regulated and therefore the broker must be very careful in order to protect their client and themselves. Below are key tips for mortgage brokers to keep in mind prior to brokering a hard money / private money commercial loan.
Key tips for brokers
1. Fully understand the deal and what the client is trying to accomplish (a hard money lender is going to want to know the story behind the loan).
o What led to the borrower?s current situation?
o How long does the borrower need the money?
o How quickly does the transaction need to be closed?
o What is their exit strategy?
o Are there issues with credit, bankruptcies, cash flow of the property, title, etc.?
o Are there liens that need to be taken care of?
2. Learn which lenders offer products that fit the deal you are trying to place
3. Watch out for brokers masquerading as lenders. Many times brokers claim that they are lenders when in fact they take your deal and shop it to lenders and sometimes other brokers.
4. Before submitting a loan, ensure that both you and the client understand how the loan process will work (inspections, closing, etc.)
5. Be wary of up-front fees. Many lenders in the industry charge very large upfront ?due-diligence? fees prior to issuing a commitment ($10-100K depending on the deal). Make sure that the client fully understands that these fees are typically non-refundable. Search out lenders that charge nominal up-front fees only after issuing a commitment. Do not provide any money prior to having a formal commitment in writing.
6. Ask for a formal commitment from the lender that outlines all points, prepayment penalties, rates, and other fees. Ensure you fully understand all of the terms. Since there is no ?APR calculation? for this type of loan, it is critical that all the fees are factored in (exit fees, lockout, etc.)
7. Be wary of lenders that try to pull a bait and switch at or near closing. Many lenders will offer a deal too good to be true only to change the deal at closing. Do not begin title work, etc. until you receive a final commitment in writing. Read through the entire document to ensure nothing has changed from the prior commitment.
By adhering to the tips outlined above, brokering a no-doc/hard money commercial loan results in very little incremental work on loans that have fallen out of the matrix programs. The broker should already have the key information required by most hard money lenders from their fallout deals. Brokers that understand when a hard money loan is appropriate for their clients, and place their clients in the appropriate products, can help more customers and ultimately increase their bottom line with a high margin loan.
Glen H. Weinberg is the Chief Operating Officer of Fairview Commercial Lending, a private, wholesale "no doc" lender. He specializes in funding "alternative" loans, including "out of the box" deals to borrowers with less-than-perfect credit, tax or foreclosure issues, or other time-sensitive needs. He can be reached at (866) 634-1270 or [email protected]
