Hard Money Loans vs. Banks

Agent

Must “hang” their license with a broker. Typically sells real estate but may originate loans as well if licensed by their state and registered federally as a Mortgage Loan Originator.

Rarely used term with hard money lenders unless the sale of real estate is involved as part of the loan transaction.

Broker

Licensed as a real estate broker.  Typically the highest licensing designation.  Agents “hang” their license with a broker.  May originate hard money loans if licensed by their state and registered federally as a Mortgage Loan Originator.

Same

Loan Officer

Usually an employee of a bank, mortgage broker, mortgage banker, or large commercial lender who originates loans.  Licensing requirements vary depending on the type of institution and their state and federal licensing.

Not typically a term used by hard money lenders.

Loan Broker

Same definition as Mortgage Broker.

A licensed broker specializing in brokering hard money loans.

Mortgage Broker

Works with 3rd party institutions to find conventional loans to meet your needs.  Some mortgage brokers cross over and can refer you to hard money lenders.

Rarely used term because they are typically offering their own loan products so there’s nothing to “broker.” 

Mortgage Banker

Works with 3rd party institutions to fund loans but will primarily fund with their own money or through a pre-arranged line of credit.  

Funds loans with their own funds, a pool of funds they manage, or line of credit.

Hard Money Lenders

N/A

Brokers who run a specialized business dedicated to originating private money loans.  These people are often referred to as private money lenders.

Programs/Guidelines

Set per government agencies such as Fannie Mae, Freddie Mac, FHA, VA, USDA, State Housing Agency, and some in-house “portfolio” lending programs.

Few, if any have set “programs.” Hard money loans are customized to borrower’s needs based on loan and collateral criteria such as LTV and  DTI. Typically more flexible and faster than Conventional.

Borrowers

Good credit  with easily documented income sources.

Non-traditional income and self-employed sources are better accepted.   Income is analyzed differently and possible exceptions made for past credit flaws.

Eligible Property Types

Single family homes including 2-4 unit and some types of commercial property.

Other types of properties that fall outside of the conventional parameters i.e., rehab loans, construction loans, bridge loans, land loans, mixed use property, non-owner occupied rentals used to secure startup capital for new ventures.

Vesting

Typically always in the individual borrower’s name. 

More flexibility and generally permits vesting in trusts, limited partnerships,  Corporation, and LLCs.

Due Diligence

Minor to none.  Review of initial disclosures and final documents at signing for compliance with terms expected.

Extensive research of collateral, and borrower’s entity.  Personal guarantee and Opinion Letter typically required. 

Loan Costs/Closing Costs

Typically 1-2% of the total loan amount.  Only change if terms of loan change.

Can be as much as 3-10%, depending on the  loan amount.  Will vary based on the investors' and brokers' needs.

Servicing

Handled by the institution who originated  the loan.  Often, one institution will sell the servicing rights to a larger firm which specializes in servicing.

Loan servicer is typically the private money lender  who originated the loan, or a smaller servicing company.  Often servicers are less sophisticated with less Internet bells and whistles.

Non- Monetary Loan Covenants

Covenants required to be met during the life of the loan.  Covenants vary by lender, but typically include financial reporting, and the maintenance of various ratios such as loan to value, and debt service coverage ratios.

Similar, but may be more strict, depending on lender.  Foreclosure process may start quicker if covenants are violated during the term of the loan.

Interest Rates

Rates are typically competitive between all lenders, and generally lower than private lending.  Most customers turn to private money loans not for the rate, but because the loan is otherwise unavailable.  Rate will be locked in and guaranteed before closing.

Rates typically start at 8% and go up based on unique criteria of each loan and investors vary greatly. 

Personal Guaranty

Typically required for any commercial loan, or any commercial loan guaranteed by the SBA.

Almost always required, but is negotiable based on collateral, other assets pledged, loan to value and relationship with broker and/or investors.

Collateral

Loan will typically be a lien against one specific subject property.

 Property outside of subject property could be collateral for the loan. 

Foreclosure

Specific rules and timetables apply based on state requirements and whether process is judicial or non-judicial. 

 Timetables vary greatly and are usually much less flexible and less tolerant of default.

Funding Source

Banks and mortgage companies have a steady flow of funds to extend to their customers.  All of the funds for the loan come from one source.

Transactions can be cancelled or delayed due to investor withdrawal.  Some private lenders who manage “pools” of funds can be a more stable funding source.  Loans may be funded by one investor or larger loans may be ‘fractionalized’ and have several investors.

Credit Rating/Credit Scores

A primary factor in the loan decision.  Minimum credit scores are crucial and very rarely can even well documented explanations  reverse a “denied” decision. 

Scores are considered but investors each set their own criteria for “acceptable credit” and will be more receptive to “common sense” credit review.  Private Money Lenders will look more at the situation and the cause of the credit flaws and rely on the collateral and higher points and rate to mitigate risk.

Underwriting

Often performed in two steps. First  is an Automated Underwriting Software decision and then an employee of the bank, mortgage company, government agency, or mortgage insurance company determines the final outcome.

Typically underwritten based on the experiences of the private money lender in relation to the type of loan collateral offered.  

Escrow Company

Oversees the execution of closing documents, disbursement of funds, and the recording of documents at the county offices.

Hard money lenders often personally handling the signing of loan documents and/or will accompany you to escrow to supervise the closing.

Title Company

Searches county and public records for liens and encumbrances against the subject property and the borrower.  Provides a preliminary title report and an offer of title insurance based on that report. 

Same

Counsel

Loan documents are similar between government backed loan programs and financial institutions.  Consulting counsel is always a good idea.

Loan documents are often unique to the loan transaction, and competent counsel familiar with hard money loans is strongly recommended.

Legal Opinion

Not generally required for government backed or bank loan in the personal name of the borrower.  May be required if the institution will write the loan in a different entity name.

Generally required if loan is not in personal name.  The opinion gives the lender assurances that the entity has the authority to borrow and that the person signing the loan documents is authorized to do so.