Referrals, referrals, referrals! As soon as I get a property under contract, the first thing I do is reach out to real estate investment clubs in town, and ask them to give me a few hard money lender recommendations.
I have found local investment clubs to be the most qualified referral source because their members obtain loans on a regular basis. If a lender provides poor customer service, the news spreads like wildfire throughout the REI community.
How to Pick a Lender
Based on my experience, I have discovered that the best way to select a hard money lender is to start with an interview style conversation with their representative.
Because I know I will be dealing with this individual throughout the duration of the loan process, the first thing I want to make sure is that they make me feel comfortable.
I generally lay out my loan requirements and confirm that they understand my funding request. I then let them take over the conversation and allow them to explain the loan process, and tell me more about the experience I should expect.
Throughout the conversation, I make sure to cover and evaluate the following items:
- What type of loan programs and terms are they currently offering
- What are the fees associated with obtaining the loan
- What is their current turnaround time for underwriting the loan
- What are their requirements to qualify for the loan
If any of the points mentioned above are misrepresented, it may result in a significant financial and emotional burden. For instance, in the very beginning of my real estate investing career, I thought that because hard money lenders don’t consider credit history, I’ll be able to easily get a loan for my flips.
And so I thought. Even though the majority of lenders say they don’t look at your credit score, in actuality it is not always true. They look at many different factors during the qualification process, especially if the investor is a newbie.
Therefore, you should check the qualification criteria very carefully before committing to purchase your next investment property. But this is a topic for a different blog post.
Speaking with a few lenders allows me to make an objective decision on which one will provide the best value for my current investment property purchase.
Pros and Cons of Working with Direct Hard money lender
- Some of the biggest benefits of working with a direct hard money lender is that they have a much better understanding of their own loan programs, fee structure, and underwriting criteria than an outside broker. Loan brokers frequently work with tens of different lenders, and are usually not up to date with current loan programs each one of them offers.
- Because a direct lender has skin in the game, they are more interested in learning about the intricacies of your proposed loan scenario. Direct lenders will strive to position themselves as your partner, versus just a service provider. Your ability to repay the loan has a direct impact on their company’s solvency.
- Most direct lenders charge smaller origination fees because they don’t have to pay a broker commission for the referral. With brokers charging anywhere between 1-5% of the loan amount, you can easily save thousands by using a direct lender. Lower fees means leaving more cash in your pocket to spend on items like closing costs and inspections.
- The largest negative I have experienced with a direct hard money lender is that they are limited on the type of loan programs they offer. There were a number of times that I wanted to use a specific direct lender only to find out they don’t have a program that fits my needs. After calling over fifteen companies, I ended up working with a broker who knew specific lenders that would be interested in completing my transaction.
- While hard money brokers will shop around to try to find you the best rates on the market, a direct lender will only offer you his own loan programs. If you aren’t familiar with other programs on the market, you will end up overpaying on your loan in the long run.