Hard money lenders are simply another type of mortgage broker--or could they be? Well, it depends. Following are several ways that hard money lenders are in fact very different from regular mortgage brokers--and what that can mean legitimate estate investors.
Private lenders vs. institutions
Regular lenders work with a quantity of institutions such as big banks and mortgage companies to arrange mortgages, making their cash on points and certain loan fees. The financial institution itself tacks on more settlement costs and fees, so when the closing has ended, you has paid between a few thousand to many thousand dollars in fees, points and other expenses. And the more lenders are involved, the more 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 each 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 in escrow before the closing.
Alternatively, instead of approaching private lenders individually for each new loan, the hard money lender may place private money in the private lenders into a pool--with specific criteria about how exactly the money can be used. Hard money lender then uses predetermined terms to determine which new applications fit those criteria. The loan servicing company that collects the loan payments pays them into the pool, and the pool pays a percentage of these payments back 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 known as "non-owner-occupied" properties (NOO for short). That's because "owner-occupied" (OO) properties have restrictions about how many points hard money lender can collect (ex. no more than 5 points), and the term must be at least 5 years.
With NOO properties, hard money lenders can charge higher points and costs and provide loans for shorter terms, sometimes even one year or less. That can be a may seem risky and expensive, the net income in one good "flip" transaction can easily compensate for higher loan expenses.
Knowledge of predatory lending laws
Owner-occupied (OO) properties are subject to what are known as predatory lending laws--a group of laws designed to protect consumers, especially the under-educated, minorities and the poor--from unscrupulous and unfair lending practices.
Hard money lenders should be fully knowledgeable of both state and federal predatory lending laws. And lenders will only work with hard money lenders, because a regular mortgage broker is frequently unfamiliar with predatory lending laws and could get it wrong that will get his license suspended--and may even jeopardize the non-public lender's loan.
Saving cash 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 some of the causes of using hard money loans for investment properties that you plan to flip or rehab and resell. Here's one more reason: by handling a hard money lender that has direct access to private lenders (rather than several layers of brokers), you might be saving yourself 1000s of dollars in points and additional fees.
Furthermore, utilizing a hard money lender can help you quickly have the loan you'll need, with the term you would like, with no risk for your personal credit. And if you are able to get the right kind of relationship with the right hard money lender and lenders, you can also be part of the "inner circle" of property investors just who find out about all the best deals first--and are building real wealth.