Key Questions for Brokers & Lenders Before Approaching a Hard Money Loan

If you're a broker, private lender, or referral partner working with real estate professionals, understanding the ins and outs of hard money loans is essential. These types of loans can be an excellent option for those looking to finance real estate deals without the traditional requirements of a bank, but before you move forward with a loan application, it's crucial to ask the right questions. Below, we’ve outlined several key questions brokers and lenders should consider when guiding their clients through the process of securing a hard money loan.

1. Where Do You Offer Loans?

When considering a hard money lender for your clients, it’s important to understand the geographical reach of their loan offerings. Some lenders focus on specific regions, while others might operate on a national scale. Local lenders often provide more personalized service and have a deeper understanding of the local market dynamics. Understanding where a lender can provide funding will help determine if they are a good fit for your clients' projects.

Lenders who operate on a national scale may be able to fund properties in multiple states, which is beneficial for clients with diverse portfolios. However, those working with a local lender may gain insights into the local market, giving them an advantage in evaluating properties for investment. It's essential to align your client's needs with the lender's geographic coverage.

2. What Collateral Is Required for the Loan?

Hard money loans are secured by the real estate project itself, meaning that the value of the property being developed or rehabilitated serves as collateral. Understanding how much collateral is needed is crucial for brokers and lenders. Typically, the collateral value is based on an appraisal, and private lenders will look at the cost of the project and its potential value once completed.

It’s vital for lenders to be transparent with their borrowers about the collateral they require. If your client is unsure of the project's valuation, ensure they work with an experienced lender who can guide them through the appraisal process. By providing an estimated value, the lender can help determine how much the borrower will need to put up to secure the loan. This upfront clarity reduces any surprises later down the line.

3. Does the Lender Consider Personal Credit Scores?

Unlike traditional lenders, hard money lenders often place less emphasis on the borrower’s personal credit score. Instead, they focus more on the details of the project and the value of the collateral. This can be beneficial for clients who may have a less-than-perfect credit history but are still capable of successfully completing a real estate project.

However, it’s important to note that while hard money lenders may not heavily weigh personal credit scores, they may still check the borrower’s financial background for significant issues like bankruptcies, tax liens, open judgments, or fraud. These financial setbacks can impact the borrower’s ability to secure a loan, regardless of the project’s potential.

As a broker, ensure your clients are aware of these factors and encourage them to be upfront about any potential red flags in their financial history. This transparency will help lenders assess the risk more accurately and allow your clients to plan accordingly.

4. What Are the Interest Rates and Terms?

Interest rates on hard money loans are typically higher than those on traditional loans because of the increased risk lenders take on. Brokers and lenders should be prepared to explain the varying rates borrowers may encounter. Most hard money loans have interest rates ranging from 8-14%, depending on the nature of the loan, the borrower’s experience, and the project at hand.

It's also important to note that many hard money loans are structured as interest-only payments, with the principal balance due at the end of the loan term. For brokers and lenders, understanding how interest is calculated, whether on a daily, monthly, or yearly basis, is essential for setting proper expectations. Help your clients navigate this aspect by advising them on how the rates will impact their repayment schedule and overall financial planning.

5. What Additional Fees Are Associated with the Loan?

Beyond interest rates, there are often other fees associated with hard money loans that brokers and lenders should be aware of. For instance, loan origination fees, closing costs, and potential prepayment penalties can all impact the total cost of borrowing. It's essential to ask lenders about any hidden fees or charges that may not be immediately obvious.

A good lender will be transparent about their fee structure, and brokers should make sure their clients are fully informed of any additional costs before they commit to the loan. Some hard money lenders may even charge a fee for early repayment, so ensure that your clients understand their options and the associated costs.

6. Are Loan Extensions Available?

Another critical question to ask is whether the lender offers loan extensions in case the project takes longer than expected. Construction delays and other unforeseen circumstances can push back project timelines, making loan extensions necessary to avoid default.

Brokers and lenders should inquire about the lender's policy on extensions, including how they are handled, any associated fees, and how frequently they allow for them. If your client expects delays, it's important to find a lender who offers flexibility in these situations to avoid complications down the road.

7. What Happens If Payments Are Late?

It's essential to discuss the lender’s policies regarding late payments. Hard money loans can come with stricter penalties for missed payments than traditional loans, and brokers should ensure their clients are aware of the consequences. Inquire about any late fees or interest rate hikes and how the lender handles late payments overall. Understanding these policies up front can prevent potential issues and provide clarity for your clients.

8. Why Should I Choose You as a Lending Partner?

This question may seem basic, but it’s one of the most important. Lenders should be able to explain what sets them apart from other hard money lenders in the market. Whether it's their customer service, flexibility, experience with certain types of projects, or competitive rates, brokers should assess why a lender is the right fit for their clients.

A reputable lender should be open to answering this question and provide clear, compelling reasons for why their terms are beneficial for the specific needs of the project. Make sure your clients feel confident in the lender’s abilities and the services they offer.

9. What’s the Typical Turnaround Time from Application to Funding?

Finally, brokers and lenders need to consider the turnaround time for processing and funding a loan. Hard money loans are often sought for time-sensitive projects, so knowing how quickly a lender can process and approve a loan is crucial.

Ask lenders about their typical timeline for reviewing applications, conducting appraisals, and disbursing funds. The faster the turnaround time, the better it will be for your clients’ projects, especially when they need to move quickly on a property.

Final Thoughts

Hard money loans can be an invaluable tool for real estate professionals, but navigating the world of private lending requires a thorough understanding of the terms and conditions. By asking these key questions, brokers and lenders can help their clients make informed decisions about the best loan options available to them. Whether you’re dealing with a short-term fix-and-flip or a long-term rental property, understanding the ins and outs of hard money lending can set your clients up for success.

RCN Capital

At RCN Capital, we specialize in providing financing solutions for real estate professionals, brokers, and investors. We offer a range of loan products including short-term fix-and-flip loans, long-term rental financing, and new construction loans. With flexible loan terms and competitive rates, RCN Capital is committed to helping your clients find success with their real estate investments. Connect with us today to learn more about how we can help your clients achieve their investment goals.