Fix & Flip Hard Money lender credit check, tax returns, app fee?

Question

So I have an investor client who is using a hard money lender offering 7% and 2 points (the "broker" is adding 2 points and a $1000 application fee).  They run credit, require 2 year tax returns, pay stubs, 10% down and basically are acting like a bank.  The hard money lender will loan 75% of the ARV towards repair costs and purchase.

My question is although the 7% is a game changer for BRRRR , is it normal to charge an application fee and do all the personal background due diligence on the investor?

I met the "broker" and he seems knowledgeable and legit but Im just concerned for my client who is a "flipper newbie".

Jiva Segaran · Answer

Thank you @Kerry Boyle, it seems hard money lending is truly "creative" financing and can fit different scenarios. I actually got their preapproval letter and it is written as follows , mind you it is a hard money loan :

LOAN AMOUNT: $195,000.00 | LOAN TERM: 360/ 36 MONTHS. [REHAB LOAN AMOUNT]

Amortization Type: BALLOON MORTGAGE INTEREST ONLY (If Applicable)

Your interest rate, points and payment will be determined upon your rate being locked in. Please contact XXX for clarification of our lock-in policies for your mortgage

product. [If applicable,] generally you must lock your rate at least 5 business days prior to closing or a rate will

be chosen for you.

APPLICATION, UNDERWRITING & PROCESSING FEE: This commitment will be in effect only upon

receipt of this fee with this letter, executed by you within 3 days of the date of this letter. The fee is CREDITED

and will be applied to the total fees and/or monies due at closing to XXX.

Its tricky for me because Im submitting offers on rehab properties but not sure if I can call it a cash offer because there is a mortgage contingency.

Kerry Boyle · Answer

As a hard money lender, we don't require tax returns, income verification (except in very unique circumstances). We do require 10% down minimum and do have an underwriting fee, but it is charged after pre-approval is issued and the appraisal is accepted. 7% is a great rate though (our min is 9%) so it seems like they are requiring tighter underwriting which allows them to cut a few percentages off.@George Taylor makes a good point, as you usually will pay less going directly to a lender (for the future).

Jiva Segaran · Answer

Thank you , I will advise them. Yes they already paid the app fee to get "pre-approved" . Well see how it goes.

George Taylor · Answer

@Stephanie Potter I like your posts..

George Taylor · Answer

@Jiva Segaran Most HML do not require tax returns, etc. For most, they worry about what you have to bring to the table, your experience, and your exit strategy. I wouldn't pay anything for a processing fee. You pay that and they can't guarantee you funding so that is going straight into their pocket. A broker will add the their fees, a lender will add their fees, and a broker will sell the loan to a broker so more than likely the broker is making the same, if not more than the lender who actually has the liability of loaning you the money. My suggestion is go directly to lenders and skip out of the middleman and added fees.

Stephanie P. · Answer

@Jiva Segaran

Why would they put in an offer in if they have to pay an application fee???

Jiva Segaran · Answer

Thank you @Stephanie Potter, do most hard money lenders also require that much documentation from the buyer? He said it was to be able to get the lower 7% rate because the buyer's credit and debt/income are good.  Yes the application fee was what raised my concern. But we shall see , they want to put an offer in today.

Stephanie P. · Answer

@Jiva Segaran

The interest rate is very good, but $1000 application fee makes me say run.  Even if the money goes toward an appraisal, appraisals for regular 1-4 properties don't cost that much.

Most institutional hard money lenders charge anywhere from 8 to 12%.  Cost about 4 points all in (meaning with room for the broker).  All that I know have a minimum amount in fee income per deal that they are going to make.

Most are 80-90% of the purchase and 100% of the rehab (done as an escrow hold back).  You have to be cognizant of the as is value as well as the percentage of the finished value or ARV.

Stephanie