Professional Lenders a.k.a Hard Money

The Professional Lenders that I am referring to here are usually found through Mortgage Brokers, Mortgage Agents, and other real estate investors.  The best way to find professional lenders is to network with other real estate investors, in particular house flippers, and find out where they are getting the money to fund their deals. You might also find these types of lenders in the local media, online and in newspapers.  They are usually advertising that they lend first, second, and third mortgages.  One example of a Professional Lender that advertises on television is  Harold the Mortgage Closer.

Second and Third Mortgages

Second and third mortgages indicate their position of repayment if the borrower defaults.  On conventional mortgages, a second mortgage is a second lien on a property.  Due to lender guidelines, it is rare for conventional loans for a property having a third or fourth mortgage.

In the terms of a power of sale, a second lien holder can start the foreclose process when a homeowner stops making payments. The second lien holder has to satisfy the first mortgage balance before they could collect on the second mortgage balance.

Not many A lenders will let you put a second mortgage on a property when closing, but B lenders are usually more flexible in allowing it.  Although, you can put a second or third mortgage behind a first mortgage once a property has closed.  It will depend on whether the lender of the second or third see significant equity in the property, a high credit score, and employment history.

Predatory Lenders

Professional Lenders are also mixed in with what might be called predatory lenders.  So you need to be very careful.  a predatory lending is a 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, with the intention of taking over the property from the mortgagee.

Professional Lenders are high net worth individuals that are willing to lend investors funds to purchase properties.  In module 7 of this course I will discuss in more detail how to find private lenders in your personal network which is much different than what I am referring to here.  For now, I will focus on the main ideas around professional lending.

Usually this type of lending is for house flippers, and based primarily on the strength of the property and its after repaired value, and less on the lender themself.

What can You Expect From a Professional Lenders through Mortgage Brokers, Mortgage Agents, and other Investors?

  • Fees and More Fees – This could be 1-3% of the mortgage value.  You would often pay the legal fees of the lender, and a lending fee to the mortgage broker or agent that put together the deal.
  • Interest Rates – The rates of a professional lender are often much higher than an A or B lender.  Currently first mortgages from a professional lenders that I am getting run from 8-14% interest rates.
  • The Terms – The terms of the mortgage are often shorter term from 6 months to a year.  Payments depend on the lenderbut can be interest only payments, balloon payments at the end of the term, or a regular principle and interest payments.

Know How to Avoid a Predatory Lender

As mentioned before you need to avoid those lenders who are really more interested in getting every penny they can from you and then taling the property as well.  A  predatory lender will include some or all of these:

  • have lending fees that run above 3% and will not include legal fees, title insurance fees etc
  • have large prepayment penalties that extend over a long period of time
  • have large fees that are also paid directly to the mortgage broker or agent that brought you to the lender
  • have interest rates that start lower but increase significantly over time
  • have future financing and refinancing options in order to fix the problems with the current mortgage

When Would You Use Professional Lenders?

  • Perhaps you have a renovation project that could not be financed through a bank or require construction financing.  This would be short term financing in order to complete the construction or renovations.  Sometimes traditional lenders will not lend against a property because of the condition of the property.
  • Perhaps you don’t fit the mold or an A or B lender but still want to purchase a property.  Your credit score is low, or you can’t verify your income easily.
  • Perhaps you need additional funds in addition to the purchase price, like the cost of renovations.  Depending on the actual appraised value of the property instead of the purchase price, this might be a possiblity.
  • Perhaps you need flexibilty with regards to the repayment schedule.
  • Perhaps you need the mortgage funded quickly, usually traditional lenders require at least 30 days before the can fund a mortgage.

These are all examples where a private lender might come in handy.  You just need to make sure that you are confident in the numbers and what makes the most sense when it comes to the property purchase, and your ability to remove the private lender with multiple exit strategies.