What is The Total Cost of Hard Money Loans
A good number of real estate investors opt for hard money loans due to many different reasons. The main reason is the ability of the hard money lender to fund the loan quickly. They also are an easier way to take out and pay off multiple loans to buy investment properties without hurting your credit score or debt-to-income ratio. Hard money lenders are usually not heavily regulated and have quite a bit of freedom in how they conduct their operations. As a borrower, the total cost of a hard money loan is significant as you want to pay the least amount of money possible for the loan. There can be a pretty wide range in loan sizes and loan costs between different lenders. It’s important to understand the other fees besides the interest on the loan when determining the actual cost of a loan.
Typically, the interest rate and origination points are the two main factors which determine the overall cost of the loan. Finding a good private lender, however, is more than just who has the lowest rate and fee. While terms and interest rates should be very clear from the beginning, there are many lenders who charge additional fees outside of rate/points options, making the loan more expensive than it appears to be. You, therefore, need to be aware as these other fees can quickly add up to the loan. Here are some of the main things to consider when choosing a private money lender to partner with.
Real estate investors should also be wary of any hidden costs or junk fees. These are fees that range from application, document preparation fees, credit, inspections, and even processing fees that are completely unnecessary and can cost real estate investors thousands in surprise expenses at the closing table. Look for a hard money lender that is straightforward and transparent with their loan fee structure and has the infrastructure in place to help them be successful. As a leading hard money loans provider in Texas, we are committed to establishing long-term relationships with our borrowers as we feel that being transparent with our costs helps to develop a deeper level of trust.
Some private lenders also have penalties for prepayment. The penalty is often based on a percentage of the loan balance upon early repayment. In such cases, make sure you calculate how much their prepayment penalty will add to the overall cost of your loan under different timing scenarios. For more repayment options, work with a lender that doesn’t have a prepayment penalty.
Lenders don’t usually disburse the entire amount of renovation funds at the time of closing. Draws usually occur upon completion of a pre-designated stage (flooring installation, paint completed, kitchen completed) or periodically like once a month for a specified number of months followed by a final draw. Hard money lenders with poor and slow draw processes can cost an investor time and money. Do your due diligence to make sure you work with a lender with a quick draw process so that in the event you run into any emergencies with your property and you need funds quickly, you’ll be covered.
Be sure to understand whether the lender is a loan-to-cost (LTC) or after repair value (ARV) lender. Are they lending on the purchase price and the rehab of the property or will they only lend on the purchase price? The higher the amount advanced, the lower the borrower’s out of pocket. After repair value (ARV) based lending creates a riskier loan from the hard money lender’s perspective because the amount of capital put in by the lender increases and the amount of out of pocket money invested by the borrower decreases. With such increased risk, the lender is forced to charge a higher interest rate.
A non-responsive lender is a massive indirect cost. You want to work with a hard money loan provider that guarantees a fast and easy loan process, without sacrificing any of the attention to detail needed to make sure the job gets done thoroughly. A hard money lender should give the best customer service possible to their clients and make it one of the top priorities.
When comparing hard money lenders always ask for a breakdown of all the costs and fees, not just the rate and points and factor them into the overall cost. It’s also important to note that the cheapest lender is not always the best one for your situation. At Wildcat Lending, we look forward to working with real estate investors across Texas and providing them with the best hard money lending programs in the industry. Don’t hesitate to contact us to help you in achieving your investment goals.