Hard Money Lending
A hard money lender is the individual or company who manages your loan from start to finish. Unlike a Loan Officer at a bank, this individual is likely to be an entrepreneur and runs all aspects of their business. They are responsible for:
- creating your loan package, including the application, income, credit, and asset documents you provide.
- gathering and reviewing title information as required.
- advising you on the best available hard money program they offer,
- providing you with all applicable federal and state disclosures.
- ordering and reviewing an appraisal or other asset valuation on the real estate.
- coordinating title /escrow services specializing in hard money lending.
- underwriting and approving your file for a private investor,
- providing a source of money (private investor) to fund your loan.
- determining the loan servicer (where you make your monthly payment) of your loan.
- creating final loan documents and coordinating loan settlement or closing.
A private investor provides the money for your loan. This could be your hard money lender providing personal funds, but in most cases it will be an outside entity or individual with whom the private money lending company has developed a relationship.
The term “investor” is frequently used in hard money because the hard money lender is seeking someone to invest in your loan. For larger loans, the investor may gather part of the loan amount from several individuals and combine the funds into one loan for you. Brokers refer to this as fractionalized loans.
Many hard money lending companies also operate a mortgage pool from which they fund hard money loans. The advantage of this funding method to the borrower is that the funds are already raised and in an account which eliminates some uncertainty as to whether or not your loan will attract an investor. In a mortgage pool, the broker or fund manager decides which borrowers they can loan to and sets the rates and terms according to the pre-established guidelines of the mortgage pool they operate.
Title Insurance /Escrows for Hard Money
These two companies are lumped together because they go hand-in-hand, and in most western states would be performed by two different departments of the same company. In the eastern half of the US the role of the escrow company is referred to as settlement services and performed or overseen by an attorney. They provide the same services for hard money deals as they do for traditional deals, although they may generally scrutinize them a bit more carefully.
Title Insurance Company – Provides a title report on the subject property being offered as collateral for the loan. This report is compiled by searching the county records for all information, liens, judgments, easements, etc against the property as well as the borrower. The hard money lender will use this report to determine if the property can be insured. If it can, the transaction continues and the title company will issue a title insurance policy that protects the investor from losses on that property if there is a defect in title. It is important that borrowers disclose all title defects to the title company. Just because the investor has insurance does not mean the borrower is also covered.
Escrow Company or Settlement Services Provider – A neutral 3rd party that collects and disburses the funds as directed by the private investor, oversees the final signing of all applicable deeds and loan documents and records executed documents with the appropriate county office. It’s usually this company’s office where you will go to sign your final loan documents, also referred to as “closing” your loan.
Appraiser for Hard Money
A licensed professional who provides an appraisal report that includes an opinion of value on the property. This report is for the exclusive use of the hard money lending company, and the private investor and is not a matter of public record. You may request to receive a copy of the report if you would like to review it.
Interestingly, an appraisal is not always required for a hard money deal. In many cases, the investor will ask to visit the property and they will make the assessment themselves as to the value. In other cases the private investor will ask for a “broker price opinion” or “BPO.” This is similar to an appraisal, but is an abbreviated statement of value from a local broker’s perspective. BPOs are often less expensive than an appraisal, used frequently for hard money, and if conducted by an experienced broker, are often a more accurate reflection of market value.
Hard Money Loan Servicer
This is the entity that collects your monthly payment. It may be your hard money lender, the private investor, or a completely separate hard money lending company hired by the investor to service the loan. The loan servicer is responsible for all aspects of servicing your loan including sending you periodic statements, year end tax reports on interest paid, and if taxes and insurance are collected monthly as part of your payment, the loan servicer will escrow the funds and pay them as they are due.
As you can see, each player has a an important and distinct role in getting your hard money transaction from application to loan closing.