Tuesday, 7 July 2015

Hard Money Loans vs Bank Loans

Hard money loans are much different from traditional lenders and banks. One of the best ways to understand hard money lenders and the private investor loans they offer is compare them. The following table below shows parties, processes and terms common to one or both types of lending and compares them in relation to each other.

Bank Loans
Hard Money Lenders
Typically sells real estate but might originate loans as well if licensed by their state and registered federally as a Mortgage Loan Originator.
Used rarely unless the sale of real estate is involved as part of the loan transaction.
Licensed as a real estate broker.  Agents freeze their license with a broker. Typically the highest licensing designation.  
Same as bank loans
Loan Officer
Normally an employee of a bank, mortgage broker, mortgage banker, or large commercial lender who originates loans.  Licensing requirements may vary depending on the type of institution and their state and federal licensing.
Not 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 search conventional loans in order to meet your needs. 
The term is used rarely because they are typically offering their own loan products so there is nothing to “broker.” 
Mortgage Banker
Normally works along 3rd party institutions to fund loans but will primarily fund with their own money or through a pre-arranged credit line.  
Loans funded with their own funds, a pool of funds they manage, or line of credit.
Hard Money Lenders
Broker who runs a specialized business dedicated to originating private money loans.  These people are often referred to as private money lenders.
Set as per government agencies like: Fannie Mae, Freddie Mac, FHA, VA, USDA, State Housing Agency, and some in-house “portfolio” lending programs.
Hard money loans are customized to borrower’s needs based on loan and collateral criteria such as LTV and DTI. Typically it is more flexible and faster than Conventional lenders.

Good credit history with easily documented income sources.
Non-traditional income and self-employed sources are accepted.  Income is analyzed differently and possible exceptions are made for past credit flaws.
Eligible Property Types
Single family homes, 2 - 4 unit and some other types of commercial property.
Other properties that fall outside of the conventional parameters like rehab loans, construction loans, bridge loans, occupied rentals used to secure startup capital for new ventures.
Always in the individual borrower’s name. 
Is 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 with terms expected.
Extensive research of collateral and borrower’s entity is done.  Personal guarantee and Opinion Letter is generally required. 
Loan Costs/Closing Costs
Normally 1 - 2% of the total loan amount. 
Can be as high as 3-10%, depending on the loan amount.
Handled by the institution who have originated the loan.  Often, one institution will sell the servicing rights to a larger firm which specializes in servicing.
Typically the private money lender who originated the loan, or a smaller servicing company. 
Non- Monetary Loan Covenants
Covenants are required to be met during the loan process.  Covenants vary by lender, but typically include financial reporting, and the maintenance of various ratios like; loan to value and debt service coverage ratios.

Similar, but may be more strict, depending on lender. 
Interest Rates
Rates are typically competitive between lenders, and are generally lower than private lending.  Most customers turn to private money loans not for the rate, but because the loan is otherwise unavailable.
Rates start at 8% and go up based on unique criteria of each