Hidden Fees of Hard Money Lenders You Didn’t Know About
What happens if you arrive at a loan closing and discover some additional fees charged by your hard money lender on the settlement statement? Hard money lenders may have some additional fees, but they may not be “hidden” after all. A lender’s fees may be right there in plain sight, you just need to know where to look. So how do you find out all of the fees so that you can better compare options among lenders?
(Disclaimer: Watch out for any fees paid prior to a loan closing. This could be an upfront fee scam).
What are the most common fees charged by hard money lenders?
Every lender charges points, but points are not considered junk fees. Most hard money lenders disclose the points they charge, so points are typically not hidden fees either. It’s the “other fees” that a lender charges that may be junk fees.
For example, many lenders charge an underwriting fee, this is in addition to the points charged. Underwriting fees can be as high as $2,000, in addition to points paid to a lender. Other lenders may charge a legal fee or a document preparation fee at closing. These additional fees charged at closing can be anywhere from $500 to $1995.
And if you have a rehab loan with a repair funds escrow, there may be even more lender fees after a loan closes! For example, after a loan closing, a rehab lender will often charge a fee for each draw from a repair escrow for repairs to a property.
How do you find all of a lender’s junk fees before you go to the loan closing?
Look at the fees listed on a lender’s website, check your emails back and forth with the lender, look closer at the term sheet or letter of intent given to you by the lender. Are the lender’s junk fees somewhere that you may have overlooked until arriving at the loan closing? When it doubt, ask! Ask a lender to give you a list of all fees that are in addition to the loan points. Clarify which fees are charged upfront before closing, which fees are charged at the closing, and if any fees are charged after closing.
Do the numbers and compare your loan options
When comparing fees charged by different lenders, first make sure you know ALL of the fees that are charged by each lender. Total up all of the points and junk fees for each lender. Then compare your options side-by-side by using the fee totals for each lender. Which lender has the lowest, total fees?
Beware of upfront fee scams whereby lenders charge fees BEFORE a loan closing
As discussed previously in the ‘disclaimer’ above, always be wary of paying any fees prior to the actual loan closing and funding. There are a ton of upfront fee scams pushed by fake lenders who have no intention of making loans. These scammers are just charging upfront fees with the promise of giving a loan. But how do you spot these scams and avoid them? Check out a video we did on this topic called, “5 Red Flags to Spot a Loan Scam.” Watch that video to avoid getting involved in an upfront fee scam.
Also, make sure you close the loan at a title company, and never wire your funds directly to a lender. The title company will provide you with a final settlement statement at the loan closing that lists all of the fees and amounts. But the moral of the story, make sure you know all of the fees a lender is charging before you get to the closing table!
Do you have questions or comments on this topic? Please leave them below.
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You make some good points. As an established “Hard Money” lender, we disclose all fees to our borrowers, including draw fees, and don’t charge ANY up front fees. We charge points and a $500 underwriting fee…that’s it. As regards fees for “rehab draws”, those are not extra charges. The inspector has to be paid for his services for going out to the property, taking pictures and writing his report. These are charges related to all rehab loans, everyone has them and it’s just the cost of doing business. That’s why it’s so important to be adequately capitalized when contemplating a “Fix & Flip” project. While comparing lender fees and points is important, your not telling the whole story. The one point you leave out is all the hidden fees, penalties and fines hidden in the note. Very few people ask to see a copy of the note, or even bother to read the note at closing. We have done many refi’s for people who used other lenders, only to find out that there were MASSIVE fee’s and penalties written into the note, should the borrower not live up to the letter of the note. I have seen 5% penalties just for going a few weeks beyond the term of the note because the lender offered no right to extend. When comparing fees for lenders, we need to look not only at the “upfront” fees, but also all the fees hidden in the note. We need to look at the timeliness of the rehab draw process AND we need to know if the lender offers the right to extend the note should the need arise.