6
CHAPTERS

How Much Do Hard Money Lenders Charge?

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This article will clearly describe the charges and costs of hard money loans (that are sometimes also called private money loans).

This includes hard money rates and terms, fees, closing costs, and payments.

There’s a lot to discuss, so let’s get started.

1
CHAPTER

Survey of Experts: Which is the most common factor that entices you to make a better offer to a hard money borrower?

2
CHAPTER

What Are Hard Money Loan Interest Rates?

Typical hard money loan rates range from 7 to 15 percent. Why? For one thing, rate follows risk, and hard money lending rates reflect that. Experienced investors get better rates.

The loan amount is another factor. Interest rates on hard money loans that are small will cost you more. Seven percent of a $75,000 loan won’t adequately compensate them.

With some lenders, a larger down payment will reduce your monthly payments and mitigate higher private money rates.

A more efficient way to lower your hard money loan cost is to find a loan without prepayment penalties, finish the project promptly, and pay off the loan as quickly as possible.

3
CHAPTER

What Other Fees Do Hard Money Lenders Have?

It’s important to ask, “how much does a hard money lender charge for closing costs”? Lenders can’t control third-party fees like legal fees. It’s the other fees that vary from lender to lender.

Origination fee — Sometimes called points, this fee is typical for lenders. Origination fees fall somewhere between 2% and 6.5%. If a broker was involved, they would also charge a fee, usually from 1% to 3%.

Underwriting fees — These run about $125 to $150 and should be negotiable for successful investors.

Document or processing fees — Expect around $125. Make sure they’re not charging for work being done by the attorney.

Draw fees — The rehab work portion of the loan is paid in draws as the work is done. Inspections are done to confirm that the work was completed. A draw fee covers this expense plus wiring fees.

Extension fees — Hard money loans are short-term. Some but not all lenders allow extensions for a fee. Extension fees vary widely, so ask prospective lenders for their extension policy.

Application fees — Ask what it’s for and how it’s different from their underwriting fee. They may be redundant. An application fee costs about the same as underwriting fees, $125 — $150.

Watch out for prepayment penalties and exit fees — Prepayment penalties allow lenders to ensure that they reach their desired returns if you finish early and pay less interest.

The amount is based on the time remaining on the term when you pay off the loan and is probably 1% — 5% of the loan. You shouldn’t have prepayment penalties plus exit fees.

Not all hard money lenders charge all of these fees. Shop around. Inexperienced investors may have no choice but to accept terms like these in the first few loans they receive, but veteran investors shouldn’t.

Upfront fees should only be collected for items required in order for the lender to make an informed decision.

This includes your credit report, an appraisal, and perhaps a reasonable underwriting fee to account for their time.

 

What Are Points on a Hard Money Loan?

What does ‘points’ mean in a hard money loan? In a hard money loan, ‘points’ are interchangeable with ‘origination fee’.

This is different from a residential mortgage transaction, where the word ‘points’ means interest paid upfront.

Hard money lender representatives or brokers may speak of “our fees” or “our points” without clarifying exactly what they are.

Ensure that you receive a written estimate of costs and understand it.

 

How Much Do Points Cost in a Hard Money Loan?

One point is equal to one percent of the loan amount. Some people advise borrowers to put more money down and lower their loan requests to reduce points costs.

This might make sense since the cost of points isn’t lessened by finishing early (as we’ve already discussed).

Points take a significant part of the whole loan cost. As Greg Gaudet, an experienced investor, notes in his guide “How to Start Flipping Houses“, hard money lenders mostly make money on the points rather than the interest.

 

Expert Insight

What hidden fees or other details should a borrower watch out for to avoid getting a hard money loan on bad terms from an unethical lender?

If doing any type of rehab to a project where a hard money lender provides loan funds at closing and provides a holdback for future rehab, you’ll definitely want to find out if the lender charges interest on the full loan amount (Dutch interest), or if interest is charged only on drawn balances.

This can be a substantial difference in costs. For example, let’s say a lender is providing a $200K loan, with $125K upfront and $75K as a holdback for a 6-month project.

At a 10% interest rate, Dutch interest would charge interest on the full $200K loan amount, or $10K over the 6 months.

At the same rate, if interest is charged only on drawn balances, you’ll only pay interest on money you’re using.

The $125K initial advance would accrue interest immediately ($6,250 over 6 months).

But the $75K rehab funds would only be charged as drawn. This is assuming the funds are used at the same pace ($1,875 over 6 months).

So total interest cost over 6 months is $8,125.

— Andrew Abas, Carlyle Capital, Managing Director

Never pay anything prior to closing unless it is a reasonable appraisal fee. Underwriting fees are real, however: they are a cost of doing business for the lender.

We don’t lend to everyone that comes to us. We lose some to other lenders.

Charging clients for underwriting costs for 1-4 unit fix and flip is out of the ordinary and shows that the lender is not closing many of the deals they are underwriting.

Many times that is due to the fact that their guidelines are much too tight or they change them during the process.

Also beware of national lenders who are lending everywhere. They are great at what they do, but they don’t know your area like a local lender does.

They tend to underwrite for the larger cities and cut the values on the 2nd and 3rd tier cities to reduce their risk of the unknown. If you are in a larger city, then they are great to work with.

— Wendy Sweet, Carolina Hard Money.com, Owner

Even reputable lenders may have fees that you are not aware of, so be sure to ask for an estimate upfront of all loan related costs.

These may include origination fees, exit fees, a prepayment penalty, draw fees (if a renovation or construction loan), and any fees paid to a third-party originator or vendor that will be passed on to you.

Online research, including checking review websites, the BBB, and even complaints with the Secretary of State where the lender is located, is the best way to avoid working with the wrong lender.

Obtaining a personal reference from a trusted colleague is also a great place to find a reputable lender.

— Noah Grayson, South End Capital, President

Larger expense deposits are not being used toward the actual deal itself. Some larger deals do require an expense deposit depending on the size.

But make sure you know how it’s being used, if you have any control over which vendors are being requested and if any of it is refundable.

Also, make sure to have that in writing. I would generally avoid fees to pay for a simple loan review without any terms or conditional approval.

— Marc Simpson, Peak Choice Capital, LLC, Lead Originator/President

Fees aren’t necessarily unethical as long as they are disclosed. But do watch out for prepayment fees, especially if you may pay the loan off early or quickly.

Also watch out for hidden “underwriting fees”, “doc prep fees” (especially those that involve legal fees), “service fees”, “payment processing fees”, additional “referral fees” to brokers involved in securing the loan, and “draw inspection” fees.

We don’t charge any of these junk fees, but we do have a one-time reasonable “rehab admin” fee for flip and construction loans, which includes all needed inspections and draw processing.

— David Goldberg, The Investor’s Source LLC, President/CEO

Upfront fees are a red flag, so don’t do these and move to another lender.

Also, bait and switch and final disclosures changing from the original estimate are a red flag, so be cautious and definitely challenge any change in estimate if the loan amount didn’t change.

— Aaradona Walker, Sun Pacific Mortgage & Real Estate, Loan Originator

There are lend-to-own lenders in this space with the end objective of obtaining the property through default, even through a technical default.

So borrowers should read loan documents carefully and only work with reputable players in the space.

Doug Perry, Archwest Capital, SVP

Most often a lender will quote points charged on the loan amount but will leave out all the other fees (underwriting, document preparation, escrow, title, legal, etc.)

— Darren K. Proulx, Newmark Investment, Inc., President & Broker

Watch out for application fees. Money paid upfront is not required and usually indicates a scam.

— Alex Bogumil, Capital Fundings, LLC, Owner/Underwriter

The fees on the loan can be whatever the lender wants, so be curious on what all the extra fees on the settlement statement are.

— Jevon Perra, Jcap Private Lending, Director of Growth
4
CHAPTER

What Are Hard Money Loan Closing Costs?

Other than the lender’s costs that we talked about, closing costs for a private money loan are similar to the costs for other loan closings.

Appraisals — The loan amount will be dictated by a maximum percentage of the acquisition and rehab costs and a maximum percentage of the final ARV.

For example, some lenders will lend 100% of the acquisition/rehab costs not to exceed 70% or 75% of ARV.

An appraisal determines the current value and the ARV of the property. Hard money appraisals cost $400 to $750.

Legal — Attorneys charge around $450 for their services. This may or may not include the title search.

Title search — In some areas, the title search is performed by a title company and charged separately.

This cost is from $150 to $250. In some jurisdictions, a title company serves as the closing agent instead of an attorney, and they may charge more.

Title insurance — This cost will be impacted by the value and location of the property. Lenders require that they be covered for their exposure, so the loan amount also comes into play.

A rule of thumb is that title insurance will cost anywhere from .25 to .33 of one percent of the property’s value. Title insurance on a $250,000 property will cost $650 to $850.

Builder’s risk insurance — This is a type of insurance policy created for the unique needs of properties under construction. Builder’s risk coverage costs somewhere between 1% and 5% of the total project costs.

Pro-rata taxes — When you take ownership, you will pay your portion of the real estate taxes for the time from closing through the end of the year.

If you fix & flip before the year is over, you’ll get some of that back at the closing.

5
CHAPTER

How to Get the Best Offer from a Hard Money Lender?

Expert Insight

How should a borrower prepare before applying for your loan to get the best offer from you?

Providing a concise and transparent summary of a project requiring a hard money loan is critical. The more gray areas we see, the more likely it is to create concerns.

If a borrower presents the crucial information and makes the process easy, they are much more likely to garner interest of a private lender who will imply that this borrower would be someone who is easy to work with.

Contrastly, if a borrower can’t get their story straight and doesn’t know their numbers, a private lender is much more likely to have concerns as to whether the borrower can complete the project on time and on budget.

— Andrew Abas, Carlyle Capital, Managing Director

A well-prepared plan helps, though surprisingly, very few of our borrowers come with a formalized plan.

Having a thorough and complete itemized budget, with contractor bids, upfront is a must, especially for larger projects.

Of course, knowing the expected value after completion of the project is also a necessity. It helps to have basic documentation ready and organized — bank statements, PFS, tax returns, etc.

— David Goldberg, The Investor’s Source LLC, President/CEO

I highly suggest the borrower to have knowledge about the market they’re investing in before presenting any offers to sellers and the lender of their choosing.

For example, having data relating to reliable comparables, rental data, and understanding how you plan to hold the property (entity or individual).

I would also advise borrowers to make sure they meet the liquidity requirements not only to close the deal but also to have reserves available for at least 6 months.

Use resources like MyFICO.com to view your true credit scores to make sure you qualify for a hard money loan.

Many borrowers will use a FICO 3 model, but most lenders like us are using FICO 2,4, and 5, which may be much different than other versions.

Knowing your scores will help maintain expectations when it comes to cost and the leverage (LTV) a lender will allow per guideline.

— Marc Simpson, Peak Choice Capital, LLC, Lead Originator/President

Before applying for a loan, the lender may ask the following:

– Is this a cash out refinance or purchase?

– If it’s a purchase, how much is the down payment?

– What is the address?

– What is the approximate value of the property?

– Is the property owner-occupied or non-owner-occupied?

– What is the approximate credit you need?

– If they need a second mortgage: What is the interest rate on the first and how many more years to go on the first?

Keep in mind these questions before applying for a loan.

— George KengottCA Hard Money Now, Owner/Broker

Have a detailed executive summary/overview prepared that clearly and articulately outlines the project’s strengths and pitfalls.

The borrower should have a clear understanding of, and be able to explain, the project’s use of proceeds/financing needs, credit, collateral, repayment ability, exit strategy, and any known barriers.

— Noah Grayson, South End Capital, President

Because we make equity loans, determining the equity is of most importance.

Equity can come from down payment, appreciation, sweat equity, subordination, and additional security.

— Darren K. Proulx, Newmark Investment, Inc., President & Broker

Know what the ARV is even if you are holding on to it. Know what the market rent is. Know your repair expense.

If you don’t know your numbers, then you are not ready to invest. Do your homework.

— Wendy Sweet, Carolina Hard Money.com, Owner

Understand the project they are requesting financing on and be able to explain it. Be prepared to document borrower experience. Be realistic about as-is and after-repaired values.

— Doug Perry, Archwest Capital, SVP

The offer is determined from purchase price, how much the renovation will cost, how much the value will increase from that renovation, the experience of the borrower in doing these deals and their credit score.

— Jevon Perra, Jcap Private Lending, Director of Growth

Do your homework. Having your numbers and paperwork ready makes for a faster and easier loan process.

— Loren HowardPrime Plus Mortgages, Founder

Know the loan amount they want and have a good down payment/good existing equity.

— Aaradona Walker, Sun Pacific Mortgage & Real Estate, Loan Originator
6
CHAPTER

How to Calculate Hard Money Loan Payments?

Now, let’s go over calculating approximate hard money loan payments in advance to help you avoid thinking about how to get out of a hard money loan later.

Many hard money loans are interest only. The borrower pays interest on the loan until they repay the principal.

If the loan is repaid like a true construction loan, you pay interest on the amount of money you’ve used.

If you use $135,000 for the purchase and the interest rate is 10%, you’ll pay $36.99 per day in interest ($135K x 10% = $13,500 annual interest / 365 days = $36.99) until your next draw.

Some lenders use 360 days for per diem (per day) interest calculations.

If you then draw $25,000 for construction, it’s added to the balance, and you perform the same calculations on $160,000.

You’ll pay $43.84 per day for the amount of time that your balance is $160,000, and so on.

For budget purposes, find out how often your lender will make draws. It may be monthly.

If your lender makes draws monthly, and you estimate two months to finish rehab, divide the construction funds by two.

The first month’s budget interest payment is based on the purchase draw.

The second month’s interest is based on the original draw plus the second draw.

The third month’s interest expense is based on the total loan amount.

Plan on paying interest for the entire term of the loan. You may sell faster than that but plan for the worst and hope for the best.

If a lender charges interest based on the entire loan amount, whether you’ve used it or not, find another lender.

Some hard money loans are amortized principal and interest (P&I) loans. They are amortized for 30 years, although the loan will be repaid within one or two years.

Most of the payment is interest in the early years of an amortized loan. You won’t see a big paydown of the principal.

The P&I payments are about 5% higher than interest only loan payments. The extra payment amount is principal which reduces your payoff, so there isn’t much difference on that score.

 

Expert Insight

How can an investor quickly calculate an approximate hard money loan cost for their project?

For the loan itself:
Loan Amount * Interest Rate * (# Months/12) + Loan Amount * (Points + 2% [as a cushion to account for any processing/legal/underwriting fees])

Where the following variables:
Loan Amount = total loan amount (ie: $250,000)
Interest Rate = provided interest only rate (ie: 10%)
# Months = Timeline to payback loan (ie: 5 months)
Points = Origination Fee (ie: 2%)

So as an example:
$250,000 * 10% * (5/12) + $250,000 * (2% + 2%)
Total Cost of Loan = $10,416 + $10000 = $20,416

— Andrew Abas, Carlyle Capital, Managing Director

Each lender has different credit guidelines and underwriting parameters, so financing costs will vary.

But, formulating a long-term relationship with a lender and learning its lending appetite and terms will enable you to better forecast costs on future projects.

Many lenders will post estimated interest rates on their websites which can be useful.

However, delivering a concise and detailed executive summary to a lender (or completing their online summary form or application) is a must.

This will enable the lender to quickly provide you an estimate of financing terms that may be available for your project.

— Noah Grayson, South End Capital, President

Lenders charge different fees. Most charge points/origination fee, underwriting/due diligence fee, and interest.

In addition, you should be asking what the loan is after the repaired value they are willing to lend. Percentage of rehab? Percentage of purchase price?

Remember, bringing a down payment is money you will get back on the refinance or sale of the property.

Points and fees are a cost of doing business. Sometimes it is better to bring more down to pay lower points and fees.

To quickly calculate, add the points plus fees and then add about $2,500 for attorney fees, appraisal, title work, insurance, and the like.

— Wendy Sweet, Carolina Hard Money.com, Owner

Expect to put down 80% even if you qualify for higher loan amounts or leverage.

Pay attention to things such as the prepayment penalty (if there is one), origination cost, cost of rehab draw funds (if you’re doing any repairs or construction), feasibility reports, and appraisal cost.

These are the most common costs of hard money bridge loans outside of title cost and hazard insurance.

— Marc Simpson, Peak Choice Capital, LLC, Lead Originator/President

Take the projected as-completed value and multiply that by 70-75% to give you the estimated loan amount.

Then, multiply that by 16% which will cover all fees, expenses, and interest for a year. Adjust accordingly depending on how long you think you’ll need the loan.

— David Goldberg, The Investor’s Source LLC, President/CEO

Take the loan amount, say $100,000 and let’s say the interest is 8%, then that is $8,000 per year interest.

Divide that by 12 (months) and that’s what the payment is, which is $666.66 per month.

— George Kengott, CA Hard Money Now, Owner/Broker

We require a minimum of 20% of the purchase price as a down payment.

The loan amount, plus the amount borrowed for renovations multiplied by 2% is a rough estimate of our costs for the loan.

— Alex Bogumil, Capital Fundings, LLC, Owner/Underwriter

Loan costs are typically 7% of the borrowed amount. That is all-inclusive. The interest rate depends on the ultimate loan to value.

— Darren K. Proulx, Newmark Investment, Inc., President & Broker
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