Unless you’re a millionaire, you know that the best option for you to finance your commercial real estate property is through loans! Now, if you’re planning to obtain a loan from a hard money lender, you need to know a couple of things about your lender. What’s the best way to know? Guessed it right! Asking them relevant questions will give you a much clear picture of what they are really about! Because, unlike banks, financing loans from hard money lenders is quite a different deal, and it can involve risks or rewards totally depending on who you choose for and how you deal with them. The hard money for commercial real estate loans are not at all difficult to obtain. The one important concern though, is that these hard money lenders are not as secure as banks, but of course, they are still thriving in the industry because they’ve got their own set of advantages. So here’s a list of “Must-Ask” questions that you need to ask your hard money lender before taking a call of getting a loan from him.
Asking these questions to a hard money lender is extremely important because it’ll prevent you from falling into any sorts of a trap. You are less prone to getting cheated when you know your lender. Just like banks do the “Know Your Customer”, you’ve got to do the “Know Your Lender”!
Don’t do the mistake that most other hard money borrowers do – Getting intimated when asking about hard money and thus letting hard money lender to take an authority over the conversation. With the following questions, let your lender know that you’ve done your research and this reassures them that you’re not going to get tricked! Without further ado, let’s get started! With these questions answered, getting a hard money loan for real-estate won’t be a difficult task. So, hang in tight!
Question # 1 – Are you a direct money lender? Or do you work as a Middleman?
Never make the mistake of assuming that all hard money lenders are direct money lenders. They are not! Not all of them are! Some of them outsource the funding of loan to other financing companies and keep a margin for themselves. It’s more like a regular market scenario where a grocery vendor buys vegetables in the market at the wholesale prices and resells it to you by a slight margin. A direct hard money lender is the one who’s going to process the entire loan along with also funding this loan with internal resources. On the other hand, a lender who works as a Middleman will send a proposal and request other loan companies to find your loan.
What needs to be observed here is that a loan that’s sanctioned by a direct hard money lender will be much smoother and easier. And down the line, if you have any issues with your loan, your lender will take full responsibility. But if he’s only acting as a middleman, he’ll shift al the blames to the company that’s actually provided you a loan and this company since it has no direct agreement with you won’t be help legally responsible for anything that might go wrong! Also, you never know the actual value of the loan that your hard money lender is getting it at! If his margins are too high, you’ll end up paying much more extra than the real costing. So, look out for direct money lenders.
Question # 2 – How many years of experience you’ve got in hard money lending?
You can count on someone who has an experience of a year or two in baking to bake your cake, but you cannot count on real money lenders who’ve just entered the business. It’s your big decision to buy a commercial property, and loss of money is a real threat here. Because you hired an inexperienced guy will make you regret later and also lose your money. So ask this question straight to your lender. Do not hesitate to ask about this particular one. If he’s got any less than 2 years of experience, bid adieu to him as there are many other money lenders in the market to take your business. Unless he’s your last resort, do not settle down with any lender who has less than 2 years of experience. The more experience he has, the better for you! This is mainly because amateurs might do the “Trial and error” to check out which ones working best for them and you know that your money is not on a trial! So, watch out for people who have a lack of experience in this arena.
Question # 3 – Do they have appropriate state licenses?
Yes! Not everyone who has good money can work as commercial hard money loan lender. Every state has its own policies to give a license to act as hard money lenders. Make sure that you are financing loan only and only from a money lender who follows all the legalese in the state they are operating. This license can be displayed on their official ID, their business cards, brochures and anywhere they advertise about their work. If it’s not available there, inquire about it, and ensure that it is a licensed hard money lender. If your lender is making up reasons to not show you their license, know that you’ve wasted your time getting in touch with a wrong entity. The ID must provide all details about the licensee and any disciplinary action, if any, against the licensee. Thus you can know if he has defaulted with any of his previous customers about the hard money loans for real estate.
Question # 4 – What loan to value ( LTV) are they able to offer?
The loan to value ratio which is referred to as the LTV ratio is the amount of loan you will be offered based on the current value of the property. The valuation of the property is done on the basis of many different methods, and thus there is no one uniform LTV for any property. The LTV ratio varies from one lender to another. It also varies according to different property types. The LTV on commercial hard money loans is much lesser than the LTV on other residential properties. The rural agricultural lands will have still lower LTVs as the amount of risk there is also high. This LTV ratio is going to determine the actual value of the loan for you and your lender. This decides the principal repayment policies and the interest rates as well.
Question # 5 – Have you got any references from your previous borrowers?
What do we generally do when we’re shopping online? Don’t we look for the reviews of a particular product before purchasing it? A commercial hard money loan is not very different from that! View it as a product and you’ll automatically develop a skeptic mind towards the money lender. A good hard money lender will have no issues in showing you the references or the testimonials given by their previous borrowers. Do run a thorough background check on their references and see what other borrowers are saying about them.
In fact, if the lender is sincere and a genuine one at that, he’ll brag about the good words offered to them by their previous borrowers. So, have no shame in asking him about this!
Question # 6 – Do you have any prepayment penalty? If yes, what are the conditions revolving that?
It’s not shocking that a lot of hard money loans for real estate have a prepayment penalty. Now, why is that done? If you manage to prepay your loan amount much earlier than the actual repayment of the loan date, your lender will lose out on some money because he’d not be getting a handsome retrun on their investment (ROI) for a minimum number of months or years as their lending criteria. Thus, he’ll ask you to a pay a prepayment penalty. It’s not the case with all commercial hard money loans. But ensure that you know about this well in advance. Because especially, when your lender knows that nothing about prepayment penalties has been discussed, he can charge you excessive penalty rates and you can do nothing later! So, rule out the problem in the first place by asking him well in advance. If there is, get a clear picture of all terms and conditions revolving around that.
Question # 7 – What is your interest rates and what are the points at which they fall due?
Well, this is the most basic question. And everybody must ask this fundamental question. Interest rate factor and the points at which they are charged are the two basic factors which determine the overall cost of your loan. This must be the first question you ask your lender. Speak with few lenders to get a good idea about different rates charged by different lenders which help you in taking a right call.
Question # 8 – Do you charge any extra fees for originating the loan?
Hard money loans for real estate are often a large amount of money and there can be other fees charged by the lender when you produce him documents for documentation. What happens in real case scenario is that your money lender will inform you about the interest rates and points at which he’s going to charge them, and hell stop there. He’ll wait patiently for some time and then inform you about other extra fees upon documentation. Thus, ask him about all the charges he’s going to charge to get a clear cost comparisons picture between different lenders.
And of course, standards fees like title insurance, escrow, notary and recording fees are to be paid by you and these general charges do not amount to the extra charges charged by your lender. Know about all the charges well in advance to get a clear picture of cost comparisons.
These are the top 8 “Must – Ask” questions before you finance your hard money loans for real estate. Watch out for all these and look at it as a shopping experience where you compare the cost and benefits of different products! Gets much simpler that way!
