Want to get an idea about how much money you should have to close a hard money loan? In this blog, we will discuss all the common fees involved in getting a hard money loan, fees that you should never pay for, and some tips to save on closing costs.
Characteristics of a Hard Money Loan
Hard money loans are quick and easy ways to secure financing for real estate investments. They are short-term loans that have more lenient requirements than traditional loans. Hard money loans granted to borrowers focus on the asset rather than your credit score. Hard Money Lenders do not usually concern themselves with the usual criteria traditional lenders employ. As compensation for the risks taken on by hard money lenders, they tend to charge higher fees and rates that vary from lender to lender.
Types of Fees to Expect on Hard Money Loan
Hard Money Lenders operate by charging rates and fees on the loans that they grant. Collectively known as “Closing costs”, these fees are generally higher than the ones required by traditional or commercial lenders. Hard Money Lenders, in return, give more personalized services and faster processing of loans.
Origination Fees
These fees charged by the lenders go to administrative and operational costs for running the company. The fees charged are usually between 2.0% to 5.0% of the loan amount. Some lenders require upfront payments for these fees. Other lenders, however, include them in the interests of the loan. Sometimes, lenders allow negotiations for lower origination fees.
Underwriting or Documentation Fees
These fees range from $ 500.00 to thousands of dollars, dependent on how complex the loan is. These fees go to legal firms whose services the Hard Money Lender secures for preparing all the documents needed before loan release.
Title Insurance
A lending company, in this case, a Hard Money Lender, who uses his funds to finance the investment needs of his clients, must make sure that the title of the property presented as collateral is free and clear. To satisfy this condition, lenders enjoin the services of Title Companies to do Title Searches.
These independent companies investigate and make sure that the title is free and clear of liens, back taxes, other party ownerships, easements, and conflicting wills, to name a few. The Title Company also conducts Property Surveys that outline the property perimeters and check for any encroachments.
Lenders also need to secure from the borrower Title Insurance, which seeks to protect the mortgagee’s investments in the loan. Sometimes, despite all the safeguards in place, there could be cases where there are successful challenges in property ownership. At such times, the policy will protect the lender and enable him to recover his investment. For this scenario, you can secure an Owner’s Title Insurance Policy for the same investment recovery purposes.
Appraisal Fee and Inspection Fee
While these are two separate requirements, both involve the property itself.
The Appraisal is mandatory for the lender, while the inspection is optional. Licensed appraisal companies conduct property appraisals and determine the current value of the property compared to the properties for sale or recently sold in the area. Also influencing the valuation are the current market value of the properties within the vicinity or community. Sometimes they also consider the general salability of properties in the community. A property inspection, on the other hand, determines the specific condition of the house. The result may help you in budgeting the rehabilitation costs of the property.
Property Insurance, and Builder’s Risk Insurance Policy
Property Insurance protects the owner from accidents that happen within the property and damages to the property. In cases of Fix and Flip Loans or Construction Loans, another type of Insurance Policy is a requirement from the borrowers. The Builder’s Risk Insurance protects you from damages, theft, and vandalism on the property and purchased materials while the rehabilitation or construction is ongoing. It is usually between 1% to 4% of the project cost.
Other types of Insurance policies may also be required such as Renters’ Insurance, Flood Insurance, and Earthquake Insurance.
Escrow Fees and Miscellaneous Closing Expenses
There is also a need to pay Escrow Fees. These fees usually take care of the property taxes that the borrower needs to pay the government every month. These are included usually as an added service as the lender takes care of the payment for you. They are typically added to the monthly amortizations or monthly interest payments and lodged as escrow funds.
Exit Fees
Exit Fees differ from closing fees. These are administrative fees charged by the lender to close the account. They are also applicable if you have decided to change lenders, thus effectively closing the loan with your current lender.
Hard Money Fees You Should Avoid Paying
Extension Fees
Extension fees are added into the amortization if you fail to make payments on time or every due date. Lenders charge these fees to recover from the missed opportunities they could have taken if loan payments are on time. Paying amortizations or installments before or on the agreed monthly due dates avoids extension fees.
Pre-payment Penalties
Lenders collect these fees if the borrower decides to pay off the loan before the maturity date. The penalties cover the supposed earnings that the lender would have made if the loan reaches the scheduled maturity date.
How to Save on Fees
There are at least four ways to save on the loan fee hard money lenders charge to borrowers:
- Increase your equity
- Establish a good and long-term business relationship with your lender or creditor
- Sell your project well to convince the lender to invest in you
- Establish a good credit standing
With any of these, lenders may want to keep your business and thus offer reductions in interest rates or on the closing fees that they charge.
A higher down payment or equity can be seen as your commitment to the project and will not easily be discouraged if there are some unforeseen hindrances. It means that you are as invested in the project as they are.
Establishing a good business relationship with your lender will allow you to take advantage of your history with the lending company. While a good and long-term business relationship will prompt the lender that your business is for keeps.
It is also an advantage if you know the details of your project very well. It means that you have studied all the factors for consideration with the project, and thus, you will have alternative plans of action for any event that may happen.
A good credit standing will also signal to the lender that your payments are always on time.
Conclusion
While fees are all unavoidable and inherent in all lending transactions, hard money lenders are known to nurture business relationships with their clients and, in some way or another, provide personalized or customized services to everyone. It is also advantageous for you as the borrower to reciprocate the same since you will greatly benefit from a good working relationship with your lender. Maintaining good relationships will also result in faster transactions and processes whenever you apply for a loan.
If you’re looking for the best hard money lender in Houston to start a relationship with, GL&L Holdings is ready to help you succeed in your real estate business. When it comes to fees, we understand that every dollar counts so we make sure that we are flexible and all our loan fees are reasonable. We disclose all types of fees and do not collect upfront, prepayment, or exit fees!
Want to learn more? Check out our loan programs or get in touch with us by calling 832-770-8415 or sending us an email at info@gllholdings.com.
