Selecting a Hard Money Lender is very important and can be a major key in helping an investor to achieve investment success. Below are some of the main things to consider when choosing a Lender to partner with.
1. Loan Terms
A. LTV- Loan to Value
When using hard money financing to purchase a property, LTV is the percentage a lender will lend based on the after renovated value (ARV) of the property. Easy Street Capital lends up to 70% Loan to Value, which means on a property that has an after renovated value of $300,000, we could lend up to $210,000.
As an example, if a lender were to lend at a 60% LTV, then on this same house, the borrower would only be able to receive a loan in the amount of $180,000. Just a 10% difference in LTV can mean a $30,000 difference between money that the borrower needs to come up with themselves to complete the project. LTV can play a large role in which projects or how many projects an investor has the capacity to take on.
B. LTC- Loan to Cost
When borrowing hard money for a project, LTC is the percentage a lender will fund at any given time, based on the current costs incurred on the project. Easy Street Capital will lend up to 90% LTC.
For example, let’s say a fix and flip project has a purchase price of $200,000 and a renovation cost of $50,000. At a 90% LTC, $180,000 (90% of purchase price) could be funded at time of purchase and $45,000 (90% of renovation cost) could be funded during and after renovation.
This means the borrower would need to come up with $20,000 for the initial down payment and $5,000 for construction costs. LTC is important for hard money borrowers to look at, because the higher the LTC, the less of their own cash they need to use at any given time.
C. Interest rate
The interest rates quoted by Easy Street Capital are calculated as an annual percentage. This means the entire interest rate would only be paid if the loan was held for an entire year. If a loan was only held for 6 months, then the borrower would actually be paying half the quoted interest rate for that loan. This is an important factor when considering a hard money lender, but there is more to look at when evaluating a hard money loan than simply the interest rate.
D. Points
Points are a fee charged by the lender and are based on the loan balance. Each point is equivalent to 1% of the amount borrowed. For example, a 3 point fee on a $200,000 loan would be $6,000. This is certainly a factor that needs to be considered when evaluating a hard money lender, however the additional fees some lenders charge also play a large role in the total cost of a loan.
2. Additional Fees
In addition to the interest rate and points, some lenders charge additional fees to get a loan closed. Some examples of fees charged are: documentation fees, underwriting fees, appraisal fees, credit check fees, background check fees, processing fees. A borrower needs to be very aware of all the fees that their lender is charging them, and not just the interest rate and points. These additional fees (sometimes referred to as junk fees) can considerably change the cost of the loan and they aren’t always as easy to find. For a lump sum loan, the only fee you will see from Easy Street Capital is a $595 doc fee. We take pride in our simple and easy to understand fee structure. We look to establish long term relationships with our borrowers and we feel that being transparent with our costs helps to establish a level of trust.
3. How quickly can they close?
In competitive markets, the ability to move quickly to get a deal is everything. By using hard money, borrowers are able to compete with cash offers, but only if their lender is able to perform under tight deadlines. A point of pride at Easy Street Capital is our ability to underwrite and close quickly. By not requiring appraisals or credit checks, we eliminate many of the hoops and time constraints commonly seen with other lenders.
4. Are they Local to your market?
For most borrowers, the hard money borrowing experience is more intimate than a traditional long-term mortgage. It is a quick transaction, with more moving parts and tighter deadlines. Most borrowers prefer to work with a lender that is local, available and truly understands their market, rather than someone thousands of miles away. Easy Street Capital is based in Texas and has a great understanding of the major Texas marketplaces.
5. Are they a Direct Lender?
Many of the hard money lenders you will come across will “broker” a borrower’s loan, meaning they act as an intermediary to connect the borrower to the capital required to fund it. We at Easy Street Capital are a direct lender and always have our own cash ready to close. As a borrower, this means you will never have to worry about the funds being there for your closing. Borrowers typically also save money by working with a direct lender because we don’t need to pay a fee to an intermediary.
If you have any questions about Easy Street Capital or hard money in general, don’t hesitate to reach out to us. We would love to help you in achieving your investment goals.
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