Hard Money Loans - Fee Income
Points - Calculated as a percentage of the loan amount. 1 point = 1% of the loan amount. A hard money lender may simplify the closing costs by charging points without detailing separate underwriting or other fees, or may charge points in addition to these fees. The amount charged depends on the transaction, agreements between all parties, loan-to-value (LTV), risk and complexity.
Here’s an example:
You are charged 3 points (3%) on your $500,000 loan, or $15,000. (This may be referred to as “up front” points because they are part of your closings costs and disbursed at the beginning of hard money loans, not collected throughout the life of the loan.) In some instances, a hard money lender may agree to pay a referral fee to another lender for referring either you or an private investor on this transaction. The lender may also agree to share a portion of the points with the private investor.
The distribution of the points paid up front might look like this:
-$8,000 to the hard money lender
-$3,000 to the referring hard money broker
-$4,000 to the private investor to increase his or her yield
Underwriting or Other Fees - These are the fees charged to you in addition to up hard money lender points. Some private lenders will charge them, and some won’t. While some fees will simply “pass through” the hard money lender, such as appraisal and credit report fees, others are a source of additional compensation. Examples are:
- Underwriting Fee - A flat dollar fee, typically between $750 and $2,500 will be charged on hard money loans, depending on the complexity. Sometimes this fee is incorporated into the points, but may be a separate additional charge.
- Processing Fee - A flat dollar fee charged for the processing of the loan.
- Doc Prep Fee - A flat dollar fee charged for the preparation of the loan documents. Sometimes these fees will be pass through because the hard money lender is using a private company to generate the documents, and sometimes this fee will just be additional income to the PML.
Referral Fees - A predetermined dollar amount or loan percentage negotiated between hard money lenders for referred business. If you were referred to your lender, chances are part of the fees you are paying will cover a referral fee to the other lender. Due to the specialized nature of private money lending, each hard money lender cannot be “all things to all clients.” The loans they can fund are dictated by the investors they represent, therefore making referral a common practice.
Loan Servicing - This fee is paid by the investor to the PML if the PML services the loan. The PML collects your payment, keeps all the necessary records, and provides you with applicable reports. Servicing fees vary, and can be a flat fee per month, or a percentage of the loan balance (e.g. 1/4 to 1% of the original loan amount, calculated annually and paid monthly.)
Late Fee Income - If you make your payment after the date specified in the promissory note, a late fee is charged. The loan servicer usually splits late fee income with the investor 50/50, but it is paid when you pay the fee.
Foreclosure Fees - The fees generated during a foreclosure may or may not be paid to the hard money lender. Many private money lenders provide foreclosure services and therefore are a profit center for the hard money lending company. In other cases, the hard money lender may outsource all foreclosure services and share in none of the foreclosure fee revenue. Typically, this income is not shared with private investors.
Renewal Fees - The fees paid by you for renewing an existing loan with the mutual consent of the private investor. If you are a good quality, on-time paying borrower, the private investor will likely want to renew the loan and keep their funds earning a return. It is common for a borrower to pay, either up front, or added to the principal of the loan balance, a renewal fee.
Every hard money lender has a slightly different business structure so their income may come from one or any combination of the sources discussed. Remember that none of this is set in stone and many of these fees for hard money loans are negotiable.
Understanding the various fees associated with hard money loans will help you negotiate the best loan transaction for your needs. Strong collateral, low LTV and excellent track record will improve your position to negotiate a lower overall cost for the loan.