Hard money loans are a great way for real estate investors to finance their investment projects. Around 40.8% of the total number of houses flipped in the first quarter of 2021 were purchased with financing by real estate investors. Though the interest rates of hard money loans are slightly higher than the traditional loans, the terms of the loan and the hard money lenders aren’t as rigid as the traditional ones.
Hard money lenders are in the business of providing quick loans to real estate investors. Initiation, processing, and closing a hard money loan requires a lender to put significant efforts to provide funds in a short time frame. To successfully run the hard money loan business a lender needs to manage all the resources and manpower. To cover all these administrative costs a lender charges a specified amount of the loan generally known as loan points.
What are Loan Points?
Loan points in hard money loans are generally referred to as origination fees or points paid to cover the administrative costs to process the loan. Hard money loans are funded by an individual or a group of investors. Lenders understand the short window to raise funds and strive to provide the investors a hard money loan as quickly as possible.
To efficiently close a hard money loan the lender needs to stay actively connected with the title companies, appraisers, and insurance agents. In order to make this happen, lenders need to bear the operational costs and expenses. These costs may include the required technology, manpower, and office spaces. The loan points not only cover the operational costs but provide assurance to the lender that you are a serious investor.
How Much Do Points Cost on a Hard Money Loan?
A certain percentage of the total loan amount is calculated and charged as a point. 1 point is equal to 1% of the total loan amount. Lenders generally charge 1% to 5% of the loan amount towards origination fees or points. The exact rate may vary from lender to lender and the conditions of the loan.
For example, if you are taking a hard money loan of $200000 and the lender has charged 3 points (3%) on your loan. This means you’ll have to pay $6000 towards loan points.
Hard money lenders consider the risks of lending money to a borrower and review their overall experience in real estate investing to charge loan points accordingly. This is why most of the hard money lenders provide 65% to 70% of the loan amount according to the after repair value (ARV) of the property. This is to ensure they don’t have to suffer any losses in the future.
There are several types of fees often charged by a hard money lender, depending on the loan terms. These are the fees that constitute the loan points and add to the overall cost of your hard money loan.
To secure their risk a hard money lender may also charge the underwriting fees to close a loan. Underwriting fees can be anywhere between $750 to $2500. Some lenders may also charge
1. Processing fees
The processing fee is a flat rate charged to process your hard money loan. The typical processing fee to close a hard money loan can be up to $500.
2. Document preparation fees
Lenders may also charge a fee on a flat rate to prepare all the documents related to your hard money loan. In some situations, these fees can be a pass-through as the lender is having private companies prepare the documents. The average documentation preparation fee can be around $500.
A lender will charge referral fees if you are referred to a particular hard money lender through another. This is a common practice between hard money lenders to cover up the fees they negotiate with each other for business referrals.
Loan Servicing Fees
An investor will have to pay loan servicing fees to the lender for all the services provided on the loan. Hard money lenders often designate third-party managers to handle all the collections, notices, insurance, taxes and prepare all the reports. Some lenders will charge a flat rate while others could charge 0.25% to 1% of the loan amount calculated on an annual basis and charge monthly.
If a monthly payment is somehow delayed due to some reason and you pay it after the specified date mentioned in the agreement or promissory note, the hard money lender will charge you a late fee. Late fees are often split (50/50) between the loan servicer and the individual or company that provided the funding.
This fee is charged if the loan foreclosure occurs and is paid to the lender or a third-party foreclosure service provider. Some private money lenders offer foreclosure services while others may outsource them. If a lender tends to use a third-party service, the foreclosure fees are paid to the respective company.
If by any chance you choose to renew your hard money loan, the lender will charge a renewal fee to do so. The lender will primarily renew your loan if you are a quality borrower and have a great record of timely payments. Renewal fees can be charged by a lender upfront or as an additional cost on the loan.
Other Fees Related to Hard Money Loans:
1. Appraisal or Valuation fee
The lender may charge around $500 to $600 to cover the appraisal or valuation of the property. It requires a licensed real estate appraiser to carry out the appraisal on a property.
2. Legal fees
The hard money lender will charge a borrower legal fees to arrange an attorney to review and overlook all the legal procedures related to the hard money loan. This may include making changes to the promissory note or deed of trust and make sure the loan complies with the official agreement. Typical legal fees for a hard money loan can range between $1000 to $2500.
Hard money loans are beneficial for investors who need money in a short time to invest in real estate. The hard money loan terms are different from a conventional loan and require an investor to pay origination fees or loan points upfront to close one. A specified percentage of the total loan amount is charged towards loan points.
If you are a real estate investor looking for reliable hard money lenders to fund your next investment project, your search ends here. Rated amongst the best hard money lenders 14th Street Capital is your best funding source for real estate investment. Investors can easily apply for a hard money loan with minimal documentation and avail attractive terms.