Hard money lenders are just another type of mortgage broker--or are they? Well, it depends. Following are a few ways in which hard money lenders are in fact quite different from regular mortgage brokers--and what that can mean for real estate investors.
Private lenders vs. institutions
Regular mortgage brokers make use of 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 settlement costs and costs, so by the time the closing has ended, you has paid between a few thousand to several thousand dollars in fees, points and other expenses. And also the more lenders are involved, the greater points you pays.
Hard money lenders, on the other hand, work directly with private lenders, either individually or like a pool. If the hard money lender works together with the non-public lenders individually, then for every new loan request, hard money lender must approach each private lender until s/he has raised enough money to finance the borrowed funds. The cash is then put in escrow until the closing.
Alternatively, instead of approaching private lenders individually for each new loan, hard money lender may place private money from the private lenders right into a pool--with specific criteria about how exactly the money can be used. The hard money lender then uses predetermined terms to decide which new applications fit those criteria. The borrowed funds servicing company that collects the loan payments pays them into the pool, and also the pool pays a percentage of these payments back to the non-public lenders.
Various kinds of properties--investment vs. owner-occupied
While regular lenders can function with homes or commercial properties, hard money lenders vastly prefer investment properties--also referred to as "non-owner-occupied" properties (NOO for brief). That is because "owner-occupied" (OO) properties have restrictions about how many points the hard money lender can collect (ex. no more than 5 points), and also the term must be a minimum of Five years.
With NOO properties, hard money lenders may charge higher points and costs and provide loans for shorter terms, sometimes even one year or fewer. That can be a may seem risky and expensive, the net income from one good "flip" transaction can certainly compensate for higher loan expenses.
Knowledge of predatory lending laws
Owner-occupied (OO) properties are subject to what are known as predatory lending laws--a set of laws made to protect consumers, particularly the under-educated, minorities and also the poor--from unscrupulous and unfair lending practices.
Hard money lenders should be fully knowledgeable of both state and federal predatory lending laws. And lenders is only going to use 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 might even jeopardize the non-public lender's loan.
Saving cash with hard money lenders
Now that we've discussed some of the differences between hard money lenders and conventional mortgage brokers, you can observe some of the reasons for using hard money lenders for investment properties that you simply intend to flip or rehab and resell. Here's one more reason: by dealing with a hard money lender that has direct access to private lenders (instead of several layers of brokers), you might be saving yourself 1000s of dollars in points and additional fees.
Furthermore, utilizing a hard money lender can help you quickly have the loan you'll need, using the term you would like, with no risk to your personal credit. And when you are able to develop the appropriate relationship with the proper hard money lender and lenders, you can also be part of the "inner circle" of property investors just who learn about best wishes deals first--and are building real wealth.