Hard Money Lenders and Regular Lenders - How They're Different

Legal Moneylender Jurong West
Hard money lenders are simply another type of mortgage broker--or are they? Well, it depends. Following are a few ways that hard money lenders are in fact very different from regular mortgage brokers--and what that can mean for real estate investors.

Legal Moneylender Jurong West
Private lenders vs. institutions

Regular mortgage brokers work with a quantity of institutions such as big banks and mortgage companies to set up mortgages, making their money on points and certain loan fees. The bank itself tacks on more settlement costs and costs, so when the closing has ended, you has paid anywhere from several thousand to several thousand dollars in fees, points and other expenses. And the more mortgage brokers are participating, the greater points you pays.

Hard money lenders, on the other hand, work directly with private lenders, either individually or like a pool. If the hard money lender works together with the private lenders individually, then for every new loan request, the hard money lender must approach each private lender until s/he has raised enough money to fund the loan. The cash will be put into escrow before the closing.

Alternatively, instead of approaching private lenders individually for each new loan, the hard money lender may place private money from the private lenders right into a pool--with specific criteria about how exactly the cash may be used. The hard money lender then uses predetermined terms to determine which new applications fit those criteria. The loan servicing company that collects the borrowed funds payments pays them into the pool, and the pool pays a percentage of these payments to the private lenders.

Different types of properties--investment vs. owner-occupied

While regular mortgage brokers can function with residential properties or commercial properties, hard money lenders vastly prefer investment properties--also referred to as "non-owner-occupied" properties (NOO for short). That is because "owner-occupied" (OO) properties have restrictions on how many points the hard money lender can collect (ex. a maximum of 5 points), and also the term must be at least Five years.

With NOO properties, hard money lenders may charge higher points and fees and provide loans for shorter terms, often even twelve months or fewer. While that might seem risky and dear, the profit from one good "flip" transaction can easily compensate for higher loan expenses.

Knowledge of predatory lending laws

Owner-occupied (OO) real estate properties are susceptible to what are named as predatory lending laws--a set of laws made to protect consumers, especially the under-educated, minorities and also the poor--from unscrupulous and unfair lending practices.

Hard money lenders must be fully knowledgeable of both state and federal predatory lending laws. And private lenders will only work with hard money lenders, because a regular mortgage broker is frequently not familiar with predatory lending laws and could make a mistake that will get his license suspended--and may even jeopardize the non-public lender's loan.

Saving money with hard money lenders

Now that we've discussed a few of the differences between hard money lenders and conventional mortgage brokers, you can see a few of the causes of using hard money lenders for investment properties that you simply plan to flip or rehab and resell. Here's another reason: by dealing with a hard money lender who has direct access to personal lenders (instead of several layers of brokers), you might be saving yourself 1000s of dollars in points and extra fees.

Furthermore, utilizing a hard money lender will help you quickly have the loan you need, using the term you want, and with no recourse to your personal credit. And when you are able to get the right kind of relationship with the proper hard money lender and lenders, you too can be part of the "inner circle" of real estate investors who seem to find out about best wishes deals first--and are building real wealth.

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