Pro Tip: Hard Money Lenders with High Default Rates Should Always be Avoided!
It’s the bottom of the ninth and there are two outs. Who is batting for you? You’ve done your research, your financial documents are ready, and you’ve found the investment of your dreams, but how do you decide who to trust to back you financially? Here are key characteristics to help you find a lender that’s right for you. Hit this one out of the park!
Hard Money Loans Funded & Default Rates
Because a hard money loan is funded by a private lender and not a bank, there isn’t as much red tape involved in applications and funding amounts. This is a double edged sword. It is to the advantage of borrowers that private money can move without many regulations–for instance, we use this to help borrowers fund deals quickly, as Intrust Funding can provide funding within 48 hours of approving your application–but there are others that use less oversight to take advantage of uninformed borrowers. That’s why it’s important to know both how many loans a hard money lender has funded, and what their loan default rate is. A high default rate means that a lender’s underwriting principles are either just bad or predatory. Intrust Funding has funded over 1,500 hard money loans, and our default rate knocks our competitors out of the park: it sits at less than 1%.
Whether a hard money lender is local is arguably one of the most important predictors of the quality of their customer service and underwriting principles. The reason is that local lenders should know your real estate market. A local lender not only will have experience providing loans in your market, but they should also more accurately underwrite your asset with your specific market’s activity in mind. This is very beneficial for you as an investor. On average, borrowers of local lenders have a lower chance of defaulting on their loans due to greater underwriting accuracy. Additionally, local lenders tend to be more invested in your personal success and can give you more personal attention than an out of state lender.
Just as business is a broad term, so is finance, and not all lenders are created equal. Especially when financing a risky asset such as an investment property, you want be sure you are in good and knowledgeable hands. Your lender should have specialized experience in funding a narrow range of assets. Specifically, they should not be focused on other financial avenues (traditional banking, mortgages, etc.). Their job is to provide short-term bridge loans, period. At Intrust Funding, we think of our borrowers as partners, because an informed borrower is successful. That’s why we focus on transparency in the loan process. Our borrowers are always in the loop, understand our underwriting principles, and, whether new or seasoned, feel confident that they have competent partners who are experts at hard money lending.
Dependable with Standard Rates
As the saying goes, “time is money”. Your lender shouldn’t have any difficulty returning calls, completing draw requests, or generally answering any questions you may have. Given today’s market conditions, you may lose out on a property because you aren’t able to find financing quickly enough. One of the main advantages to using hard money is the ability to close quickly. If you find that your “opportunity cost” is increasing, you may want to look for another lender.
Another characteristic to watch out for are unusually high loan rates (i.e. 15-18% interest). Hard money loans lend on distressed properties on a loan-to-value (LTV) basis. Generally, lenders will charge around 12% interest and 2-4 loan origination points.
And, of course, with any financial decision, choosing a lender is not to be taken lightly. Your lender should be experienced (at least a few years in business) and should be able to provide you with client references and testimonials upon request.