How To Compare Hard Money Lenders
Download the Hard Money Decision Making Matrix: https://bit.ly/31abLI5
How to Compare Your Loan Options Among Different Hard Money Lenders
You’re looking for hard money lenders and there’s a million hard money lenders to choose from. So how do you compare among hard money lenders?
Well, most people start with the interest rate and compare lenders using that metric only. Let me tell you, if you’re looking for a hard money loan based on price alone, you’re making a huge rookie mistake!
A guy comes to me the other day and he’s shopping for hard money lenders. During our phone conversation he interrupted me in the middle of the conversation to say, “I’ve already gotten a quote of 10% from another hard money lender.” And then I asked him, “Your lender at 10%, what are his requirements for final loan approval?”
The guy answers, “I don’t know. “
And the I asked him, “How much is he going to loan you for the 10%?”
He replied with the same answer, “I don’t know.” This guy didn’t know anything about the loan amount or requirements to get that 10% loan. Not only was he wasting my time, but he was wasting his own time.
Don’t waste your time when you’re shopping for hard money lenders! If you want to find the right lender for your needs, I’m going to teach you how to compare and choose the right lender.
Using a Hard Money Decision Matrix
Write down, or type out, your biggest need for a hard money loan. And what do I mean by that?
What if you need to close in 3 days? Then your biggest need for that deal is the speed of funding.
And what if you don’t have any money to bring into the deal and you’re really low on cash? Well then your biggest need is finding a hard money lender with the lowest down payment requirement.And then what if you have bad credit and no income? Your biggest need is going to be a hard money lender that doesn’t base the loan approval on your credit or your income.
Now I want you to create what’s called a decision matrix. Look it up online. Studies have proven that if you write down all your options and have them in front of you, you can make better decisions.
That’s what I’m going to ask you do right now, create your own decision matrix. And on the left side of the chart I want you to list all your hard money lenders that you’re talking to. And then each column in the chart is going to be a factor that you’re going to use to compare your hard money lenders. There are a lot of factors that you can use to compare your hard money lenders but I’m going to talk about seven important factors.
What are the seven factors for comparing among different hard money lenders? They are.
- Method of valuation
- Speed of funding
- Requirements of funding
- Cash to close requirements
- Reviews about the lender
- Monthly payments required?
- Total cost of the loan
Let’s start with the first factor for comparing lenders, it is Method of Valuation.
This means, ‘how is the hard money lender valuing a property? Are they using an appraisal? And if so, what’s the cost and timeline for getting it? Is the lender using a broker’s price opinion, and if so, what’s the cost and timeline for getting it? Find out the answer to that question!. This is extremely important, as you’re going to find out shortly as we go through some of the other factors.
The second factor for comparing your lender is, the Speed of Funding.
Just because a hard money lender’s website says that they can fund in 5 to 10 business days, it doesn’t mean that they can actually do it.
And why? Because if a lender is going to require an appraisal as the method of valuation for example, there is no way that lender is going to be able to close your loan in 5 to 10 days. It takes 2 to 3 weeks to get an appraisal back in most cases.
The third factor to use to compare is, the Requirements of Your Hard Money Lender.
What are the lender’s requirements for loan approval? This is the one that is going to require the most research on your part. You need to find out ALL of the requirements of each lender and make a list for each.
Let’s say you decide to go with a lender with a low interest rate but you didn’t read all the requirements and do your research. You may eliminate all of the other hard money lenders from your list and then discover that you cannot comply with all of the requirements of the lender with the low interest rate. And then what? Unfortunately you’d be out of options and you’d be out of time!
So make sure you do your research and list out every, single requirement that each hard money lender has.
The fourth factor is, Cash to Close Requirements.
Ask yourself, ‘what is the lender requiring you to bring in as your down payment, plus any closing costs?’
Know what your cash to close requirements are, because if your biggest need is the least amount of cash to close, you may want to choose the hard money lender with the lowest cash to close requirement. For example, if you’re tight on cash then choose a lender that only requires a 10% down payment at a 12% interest rate over another lender that has an interest rate of 10.5% with a down payment of 20%.
The fifth factor is, Hard Money Lender Reviews.
Look at the lender’s reviews. Do they have reviews? Are they good or bad? If they have no reviews, no go! Some fake lenders out there, they have no reviews. If they have no reviews, are you really going to trust that they can fund your deal when it matters? Also, watch out for loan scams in hard money. If it sounds too good to be true, it probably is!
Also, if a lender has reviews, those reviews will tell you a lot of things about lender. If you do your research and actually read the reviews, you’ll find out if a lender can really close in 5 to 10 business days like they claim on their website. Maybe you’ll read the reviews and find out it actually takes the lender 21 days or more to close rather than the 5-10 days they’ve stated on their website.
So make sure you know what the reviews are for each of these lenders that you’re looking into.
The sixth factor to compare among hard money lenders is, Monthly Payments Required?
Does the lender require monthly payments? Most hard money lenders do require monthly payments. And if they don’t, usually there’s some other factor that offsets that, such as the requirement of a larger down payment, or a requirement for a really high credit score.
And then finally, the seventh factor is, the Total Cost of the Hard Money Loan.
What is the total cost of the loan for each hard money lender that you’re talking to? For example, every hard money lender has an interest rate, loan points, and then some hard money lenders have junk fees.
So not only do you want to look at the interest rate and the points when you’re comparing your hard money lenders, but determine all of the fees that are going to be charged to you at closing and after you close on the loan. If you don’t know what the total costs are for each of the hard money lenders that you’re comparing in your matrix, you might choose a lender because they have lower points, only to find out that they have a $1,200 underwriting fee, a $500 document preparation fee, a $150 site inspection fee, etc. And if there’s a repair escrow, some hard money lenders may charge you for each draw you take out of that repair escrow. Make sure you know all of the costs!
Because each deal is so different, a hard money lender that is good for one deal may not be the right lender for another deal. A good example is a hard money lender that funds fast, versus a lender with a low interest rate that is slower to fund. You would not want to use the lower interest rate lender on a deal that needs to fund fast because he is too slow to fund.
Create your own lenders decision matrix, determine what factors are most important to you, and then rate each of your lenders on those factors. You do this by giving each lender a number 1 to 5 rating for each of the factors.
For example, for each factor (or column) of the matrix, number 1 is the lowest score and number 5 is the highest score.
For example a lender that funds fast the fastest would have a number 5 listed under the “Speed of Funding” column, while your slowest funding lender would have a number 1 listed under the “Speed of Funding” column. Rate each lender on each factor on a scale of 1 to 5.
Then you total out each of the lenders points for each factor. The lender with the highest score is the winner.
Try using your own decision matrix when comparing among your hard money lenders and you’ll see how easy it is! If you have any questions about how to do this, please leave them in the comment section below.