Hard Money Lending - 3 questions you must...

4 Replies

In your experience, what are 3 "MUST ask questions" when interviewing a Hard Money Lender to fund your project???

1. How do extension/renewals work?  There may be projects that take longer to rehab, stabilize, or sell than you originally anticipate, so you need to know how they treat you when you are coming to the end of your loan.  Will they extend or renew?  If so, what does it cost and what is the process?  How long is the extension?  Will they foreclose based on "maturity default"?

2. What are all of the non-interest rate and non-points costs?  Most people think to ask about interest rate and points but may not ask about fees like underwriting, processing, application, commitment, credit report, attorney, inspection, construction draw costs, etc.  

3. What is the draw process, how long does it take, what does each draw cost in terms of inspection/processing?  When you have completed $10k worth of work, you need to know how fast and how much work it is to get the draw that you need to pay your materials/labor and refill your coffers for the next stage of your rehab.

Hope this helps. 

@Sam Nadar Good question! Below are some of the more common questions asked of Hard Money Lenders:

1) What are your rates, and how are they calculated?

- Usually hard money will offer between 7-12% with lower rates offered to those with more experience, better credit, and more capital contributed to the deal. Lenders also vary rates based on state of project and amount of funding.

2) What are your LTV ratios (loan to value) and do you lend based % on resale value or purchase price?

- Most lenders will lend between 65-75% of the resale value, and may offer a variation such as 80-90% of purchase price including or excluding rehab costs up to 100%. Each lender is different, so this is an important question to ask. Another question would be loan amount offered - many will want a deal above $100,000 loan size.

3) What are the origination costs, and other "junk" fees?

- You can expect between 1-5% as an origination fee - also known as points. Other fees may include appraisal, processing, application, etc - so it's good to know these details up front before you decide on a lender based on interest rate alone.

Also, keep in mind if the lender is a Broker or Direct Lender (brokers bring deals to direct lenders and add their fee on top of what they would charge = more expensive for you).

How many deals have you loaned on in past 12 months? How many have extensions or workouts? Do you require personal guaranty?

I can think of dozens more, but it depends on the project and the borrower.

1) Rate, fees, and loan amount

2) Do you charge interest on undrawn construction funds?

3) How quickly can you close?

There are several more you should ask, but I was limited to 3

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