What to Look for in a Hard Money Loan Proposal

What to Look for in a Hard Money Loan Proposal

When considering a hard money loan, it’s crucial to thoroughly evaluate the loan proposal to ensure it meets your financial needs and objectives. Hard money loans, typically used for real estate investments, come with specific terms and conditions that can significantly impact your project’s profitability. Here’s a detailed guide on what to look for in a hard money loan proposal: 

1. Upfront Lender Points

Lender Points:

These are upfront fees charged by the lender, typically expressed as a percentage of the loan amount. One point equals 1% of the loan. Understanding how many points are being charged helps you evaluate the cost of obtaining the loan. 

Key Considerations:

– Compare points across different lenders to ensure competitive pricing. 

– Calculate the total cost to understand the impact on your initial investment. 

 

2. Interest Rate and Its Structure

Interest Rate:

The interest rate determines the cost of borrowing. Hard money loans usually have higher interest rates compared to traditional loans due to the increased risk. 

Fixed or Variable Rate:

– Fixed Rate:  The interest rate remains constant throughout the loan term, providing predictable payments. 

– Variable Rate: The interest rate can change, usually tied to an index. This can lead to fluctuating payments. 

 

Key Considerations:  

– Determine if the rate is fixed or variable. 

– Understand the implications of a variable rate on your future payments. 

 

3. Additional Fees Associated with the Loan

Other Fees:

Hard money loans often come with various additional fees, such as: 

– Origination Fees: Charged for processing the loan. 

– Underwriting Fees: Costs for evaluating the loan application. 

– Legal Fees: For preparing loan documents. 

– Servicing Fees: For managing the loan post-closing. 

 

Key Considerations:

– Request a detailed breakdown of all fees. 

– Factor these costs into your overall budget. 

 

4. Prepayment Penalty 

 

Prepayment Penalty:

Some loans include penalties for paying off the loan early. This can affect your exit strategy if you plan to sell or refinance the property before the loan term ends. 

 

Key Considerations:  

– Confirm if there is a prepayment penalty. 

– Understand the penalty amount and terms. 

 

5. Payment Type 

Hard money loans can have different payment structures: 

– Interest-Only Payments: Lower monthly payments, with the principal repaid at the end of the loan term. 

– Principal and Interest Payments: Higher monthly payments but gradually reduce the loan balance. 

 

Key Considerations: 

– Assess which payment structure aligns with your cash flow and investment strategy. 

– Calculate the monthly payments for both options to understand the financial commitment. 

 

6. Loan Term and Extension Options 

Loan Term

The loan term is the length of time you have to repay the loan, typically ranging from 6 months to a few years. 

 

Extension Options:

Some loans offer the ability to extend the term if needed, often for an additional fee. 

 

Key Considerations: 

– Determine the initial loan term. 

– Understand the conditions and costs for extending the loan. 

 

7. Payment Management Post-Closing

Payment Management:

Knowing who to make payments to after closing is crucial for maintaining a smooth repayment process. This can include: 

– Direct payments to the lender. 

– Payments managed through a loan servicing company. 

 

Key Considerations: 

– Confirm the payment process and recipient. 

– Ensure you have clear contact information for any post-closing questions or issues. 

Conclusion

 Evaluating a hard money loan proposal requires a thorough understanding of its terms and conditions. By paying attention to upfront lender points, interest rates, additional fees, prepayment penalties, payment types, loan terms, extension options, and payment management, you can make an informed decision that aligns with your investment goals. This due diligence will help you avoid unexpected costs and ensure the loan supports your real estate investment strategy effectively. 

About TaliMar Financial 

TaliMar Financial is a private mortgage fund that offers investors the ability to participate in the growing market of private real estate debt. Since 2008, TaliMar Financial I has focused on providing real estate investors and operators with the capital they need to purchase, renovate, and operate residential and commercial properties. Our experienced executive team has funded over $450 million in short term debt secured on residential and commercial real estate primarily throughout Southern California and has returned over $40 million to investors in monthly distributions.  

 

 

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