Questions to Ask When Evaluating a Hard Money Lender
Using a hard money lender can be a smart, convenient choice for the right real estate house flipping project. Hard money lenders offer fast approvals, have few requirements, and can finance loans banks have rejected. However, as with any big financial decision, you should vet your hard money lender. There are five crucial questions you should ask when evaluating any hard money lender.
Does the Lender Have Market Credibility?
When you take out a hard money loan, you are entering a financial relationship with the lender. You must review the lender’s experience and credibility. Ask the lender how many years they’ve been in business and how many loans they’ve approved. Your final ask should be to be connected to previous clients so you can vet the business.
What Is the Lender’s Capital Source?
There are three types of capital sources for hard money lenders: direct lenders, brokers, and syndicators. Ideally, you want to take a loan with a direct lender. These types of lenders offer their own pooled capital for approved debts. This allows them to be lenient in changing the terms and conditions of the loan. Brokers and syndicators rely on third parties for the capital and cannot approve changes or requests on their own.
How Does Their Draw Process Work?
Typically, a hard money loan for a house flipping project will not release all the funds at once. The client and lender work together to determine different stages of the home renovation. At each stage, another predetermined amount of cash is released. You want to ensure your lender allows for changes to the schedule, in case emergency rehab costs come up. Additionally, make sure you understand how long a draw will take. You can read more about draw requests here.
What are Their Lending Terms?
Each hard money lender will offer different terms depending on their client’s needs. Ensure you understand the interest rate and the length of the loan. Ask for details on how to extend the loan, if needed, and what costs are associated with extensions.
Most hard money lenders include a fee between two to five points per transaction. One point is equivalent to one percent of the loan. Make sure to ask about origination fees and if these fees are due at closing.
Lenders are commonly after repair value (ARV) or loan-to-cost (LTC) lenders. Ask which type of lender your vendor is and what the down payment requirements are. Some lenders require a larger down payment to reduce the risk on the loan. Consider finding a lender you can build a long-term relationship with. As you take out multiple loans throughout the years, you’ll establish trust, and may be eligible for more leeway on standard terms.
Some lenders fail to outline their external fees within the quote. Surprise fees to watch out for include administrative fees, processing, and underwriting. Depending on the size of your loan, these fees can cost thousands. Ask your lender for a detailed quote that lists every potential fee for the loan.
How Are Their Loans Performing?
You want to work with a successful lender that has loans that are performing well. If you require additional time to pay off your loan, they will not be cash poor or concerned. Additionally, you want to build a relationship with someone who wants you to succeed. After all, one successful house flipping project can lead to many other opportunities. Find a lender you can envision working with again.
Get Approved for a Hard Money Loan with Wildcat Lending
Wildcat Lending provides fix and flip hard money loans for real estate investors in Texas and Tennessee. A hard money loan is the perfect solution to ensure you don’t lose that investment opportunity to someone else. Hard money loans are a quick and safe option for real estate investments. Contact Wildcat Lending today to start your application.