Technically, a hard money lender is a type of mortgage lender but they are very different from standard banks. Generally speaking, hard money lenders are private individuals, which means their systems are somewhat different to that of regular banks and brokers. It is important to be aware of the differences if you are a real estate investor, because you may find yourself having to use a hard money lender.
Financial Institutions vs Private Lenders
A traditional mortgage broker will work with various financial institutions, such as mortgage companies and banks. Their money comes from loan fees and commissions. Banks, meanwhile, have even more costs and fees to pay for as well. Hence, as a lender, you often have to pay thousands of dollars in costs, fees, and expenses.
With a hard money lender, on the other hand, you will work with an individual lender, be that a single person or a pool of people.
Hard money is a way to borrow without using traditional mortgage lenders. Loans come from individuals or investors who lend money based (for the most part) on the property you’re using as collateral.
In most cases, hard money lenders have pools of money available for real estate projects. They will set some specific criteria that have to be met if they are to consider making an investment. If a loan request comes in, and all the relevant criteria are met, then it will be approved. Loan payments go back into the pool of money, which is then used to fund even more investments.
Investment vs Owner-Occupied Properties
A traditional mortgage broker will work with any type of property, whether that is residential or commercial. However, hard money lenders usually only consider non-owner-occupied (NOO) properties. This is mainly due to the fact that there are rules and regulations involved with issuing loans for owner-occupied properties and these often do not fit in with the aims and goals of a hard money loan. NOO properties tend to be used for flipping, which means the loan is more suitable for the short term.
A mortgage on a non-owner-occupied property might have a slightly higher interest rate than an owner-occupied mortgage, as non-owner-occupied mortgages are more likely to default. Because of the higher interest rate, some unscrupulous borrowers will try to classify a non-owner-occupied mortgage as an owner-occupied mortgage to try and save money.
Predatory Lending Laws
If a property is owner-occupied, it is subject to predatory lending laws.
Predatory lending is any lending practice that imposes unfair or abusive loan terms on a borrower. It is also any practice that convinces a borrower to accept unfair terms through deceptive, coercive, exploitative or unscrupulous actions for a loan that a borrower doesn’t need, doesn’t want or can’t afford.
Hard money lenders must have full awareness of these laws, both at the state and federal levels. Mortgage brokers, by contrast, don’t have to have this knowledge at all. Rather, the banks that they refer to have this knowledge.
Affordable Private Lending
Now that the difference between conventional brokers and hard money lenders is somewhat more obvious, you may also understand why certain real estate investments work better when they are funded by private lenders. An added benefit to using hard money lenders is that they are very quick to make decisions. This means that you should have the money you need available within just a few days. Furthermore, after you have completed your first hard money deal, you will have the chance to develop a working relationship with certain lenders, which you can use for any future property investments you want to make.