The most frequently asked question of Houston hard money lenders is why would a borrower finance or refinance a property with a hard money lender.
Most assume one would only borrow from a “hard money lender in Houston” if they had bad credit. It’s true that hard money lenders place less emphasis on one’s credit history but that’s only one of many reasons why one would borrow from a hard money lender.
The number one reason why one picks a hard money lender is speed. Banks and traditional mortgage companies often require several weeks to fund a loan. A hard money lender (also known as an asset-based lender) can fund a commercial property or a “business purpose loan” in just a few days.
Houston Hard Money Lenders finance thousands of borrowers a year who have excellent credit. Hard money lenders also lend to thousands of high net-worth individuals a year.
Banks are reluctant to finance or refinance real estate for a company if the company has experienced “historical losses”. A hard money lender will normally lend to a company if that company has “turned the corner” and is now profitable.
Traditional mortgage companies will not finance construction loans. Hard money lenders in Houston are much more likely to finance the construction. Most banks will finance construction loans but their requirements make it difficult for a borrower to qualify.
There is a cottage industry known as “fix & flip” or “fix & hold” investors. Those are construction contractors or experienced real estate investors that buy dated properties that are also in need of repairs. They’ll “fix” the property and “flip” it to an end user. Hence, the term “fix & flip”. Moreover, that same contractor or real estate investor may buy the property to “fix” and “hold” as a rental property. Hence, “fix & hold”. This cottage industry is almost exclusively financed by private investors / hard money lenders and/or assed based lenders.
Rural properties, unimproved properties and vacant lots are difficult to finance with a bank and mortgage company won’t finance these type properties. Again, hard-money lenders fill this void.
Most banks will not allow a second lien behind the bank’s first lien. Most hard money lenders will allow a second lien behind their first lien. Houston hard money lenders prefer second liens behind their first lien for several reasons:
- (i) that’s less money that the borrower has to invest and therefore leaves the borrower with more liquidity, and
- (ii) having a second lien behind a hard money lenders first lien is like having an additional guarantor. A second lien holder would cure the default for their borrower so that their second lien is not forfeited.
The obvious advantage to “bank financing” is the bank’s loan is less expensive. Hard money lenders cannot compete with banks on interest rates.
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The bank’s “cost of funds” is very low because they’re lending depositor’s money for which they pay very little. Hard money lenders usually fund their loans using investor’s cash or they have lines of credit with banks. Either way, they’re paying for their money. If the hard-money lender has excellent credit, good earnings and they’re experienced lenders, they’ll pay approximately 6.00% to 7.00% for their money. Therefore, the hard money lender must lend their money at a rate high enough to cover their cost of funds, high enough to cover their overhead and high enough to make a profit.
Every industry and every company have trustworthy owners and employees but every industry and every company also have untrustworthy owners and employees. A lender must perform “due diligence” to make sure the borrower qualifies for a loan. Likewise, a consumer should do their due-diligence on their lender. Vetting is a two-way street.
One should not pay hard-money lenders or mortgage loan brokers up-front fees. One should only pay “performance fees”. When the lender or the mortgage loan broker performs (i.e., funds the loan), that’s when they should be paid. That said, third party fees (e.g., appraisal fees, survey fees, environmental fees) must be paid beforehand. Also, if a lender wants a very small “application fee” upfront, that’s okay. Perhaps +/- $1,000.00 up front if it’s a complicated loan that will require a lot of due-diligence. Even then, however, the borrower should be reimbursed their application fee if the loan closes.
Also, a borrower should have a clear understanding of the terms and conditions of their loan. E.g., what is the interest rate, how much is the origination fee. (All lenders charge an origination fee that is paid at closing). What are the terms, e.g. “a 3-year loan on a 20-year amortization”? Is there a prepayment penalty? The borrower should ask for a “non-binding Term Sheet”. That way, there’s no misunderstanding and no dispute when it’s time to fund the loan.
A non-binding commitment should tell the borrower everything they need know. If a borrower wants a binding commitment, the lender will (and should) charge a fee for a binding commitment.
Finally, consumers are led to believe that because hard money lenders charge very high interest rates, they require very little documentation. Nothing could be further from the truth.
Any ethical hard money lender wants to know their borrower has the ability to repay their loan and they want to determine that the borrower is not overpaying for the property. A reputable hard money lender does not want the borrower’s property. They just want to be repaid. Therefore, one should expect the same amount of due-diligence that a bank would require.
If a hard money lender takes too high a risk, that’s a mistake by the hard money lender and a mistake by the borrower for accepting a loan with too much risk.
There is no such thing as too much vetting for the lender or for the borrower.
At AMI Lenders we finance all types of real estate. E.g., rural properties, unimproved property, vacant lots, commercial properties, residential properties, homesteads, investment properties, etc. Each type of property has different requirements.
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