WHAT ARE POINTS ON A HARD MONEY LOAN?

If you’re searching the question “What Are Points On A Hard Money Loan?” you are looking for a better understanding of the inner workings of the hard money lending process.  This post is made to help you better understand what points are and how they related to hard money lending.

Fee Based Income on Hard Money Loans

In addition to interest, a hard money loan has other fees charged by the lender. These fees are a source of income for the hard money loan lenders, therefore it is important to fully understand the income sources of lenders so you have a fair negotiation process, which is how you will obtain the best term and rates.

Points:

A percentage of the total loan amount is calculated. One point equals one percent of a loan. Depending on the lender, some hard money lenders will charge points to simplify the closing costs without providing details of separate underwriting fees, or others. Also, some lenders will charge additional points besides these fees. The charged amount will depend on transactions and agreements between the involved parties, risk, complexity and loan-to-value (LTV).

Example:

You have a $500,000 loan, and you are charged 3 points (3%), totally $15,000. These points are often referred to as ‘up front’ points since they are included in closing costs and get disbursed during the tart of your hard money loan, rather than being collected over the span of the loan. However, there are situations when hard money lenders might agree to pay referral fees to another hard money lender for sending you or private investors. Furthermore, lenders might agree on sharing part of the points collected with private investors.

Possible example of up front point distribution:

-$4,000 to private investor for increasing yields

-$3,000 to referring hard money broker

-$8,000 to hard money lender

Underwriting Fees and Other Fees

These fees get charged to you as an additional cost that increase the points of a hard money loan. With private lenders, some will charge them, others will not. Although certain fees just ‘pass through’ hard money lenders, including credit report fees and appraisal fees, others are additional compensation sources.

Example:

Underwriting Fees – This is a flat fee, generally ranging between $750 to $2,500 and is charged to hard money loans. Overall price depends on the complexity. There are cases where this fee gets incorporated in the points charged, but it could also be charged as a separate addition.

Processing Fees – This is a flat rate that is charged for the processing of a loan.

Doc Prep Fees – This is a flat rate charged for the loan document preparation. There are cases when these fees are simply passing through due to hard money lenders using private companies or creating documents, while other times the fee will be a source of additional income for the PML.

Referral Fees

This is an agreed loan percentage or dollar amount between the referred business and hard money lender. If you got referred to the hard money lender, it is likely that referral fees are part of the fees you will be paying to the lender. Because of specialized nature behind private money lending, every hard money lender is not able to provide ‘all things to all clients’. The funds they lend get decided on by investors that they represent. Thus, referral fees are a common factor.

Loan Servicing

This is a fee paid by the investor to a PML, if they are servicing the loan. A PML will retrieve your payment, maintains all required records, then provides you an applicable report. The servicing fee varies; some may be a flat rate while others charge a percentage of a loan balance. For example, 0.25% to 1% of original loan, which is calculated annually and collected monthly.

Late Fees

Another source of income hard money lenders collect are late fees, which occur if you make payments after the specified date within your promissory note. Late fees are often split with an investor (50/50), this is paid upon you paying the fee.

Foreclosure Fees

This fee is generated when a foreclosure occurs, sometimes being paid to a hard money lender, but not always. There are various PML that offer foreclosure services, thus act as a source of profit revenue or hard money lending companies. However, there are other situations where hard money lenders outsource the entire foreclosure service, and do not collect any revenue from foreclosure fees. Usually, this type of income does not get split with investors.

Renewal Fees

This is a fee that you pay for renewing your current loan with mutual consent from a private investor. Investors will likely be willing to renew your loan if you are a quality borrower who pays on time. This maintains their funds earned. Renewal frees are commonly paid by the borrower, either up front or as additional cost to the loan principal.

Each hard money lender has a business structure slightly different than another. The profit revenue may come from a single source, or a combination of the above sources. Keep in mind that nothing is set in stone, and fees of a hard money loan can be negotiated.

By having a better understanding of fees in association with a hard money loan, you will be able to negotiate a better rate for your loan. You can improve negotiation position by having a great track record, low LTV and high collateral, which can result in a much lower cost.