Lending Guide: Deal Analysis

All About The Money: Loan Costs & Fees

2018-10-30T13:30:44+00:00 Deal Analysis|

When it comes to private money loan costs and fees, there is one simple fact above all; You will pay more for a loan through a private lender than a bank. This isn’t because private lenders are shady or out to gouge you (although still be on the lookout for that). Rather, private loans are riskier on multiple fronts.

Private lenders rarely compete with banks: they are closing the loans banks will not do. They pass this risk and higher cost off to you. Lenders don’t mean to catch you unaware or hide the additional cost. Still, you should be alert for anything that seems unreasonable to you. Don’t be afraid to ask questions or negotiate.

Understanding the various fees will help you negotiate the best terms on your loan. Strong collateral, a low loan to value and an excellent track record will help you earn lower rates. Finally, before we get to the long list of all the ways lenders might charge you, let’s roll back a bit to discuss why it’s likely worth it in the end.

It may seem expensive, but …

If you start to hyperventilate over how expensive a private loan can be, try looking at it another way. How much would it cost you not to have the loan? Bear with us, this makes sense, we promise.

Take a look at this scenario. You:

  • Buy residential fix-and flip homes.
  • Only have enough cash to complete four homes per year.
  • Earn $20,000 profit per home.

Your max profits are at $80,000. If you had the capital to complete eight deals a year, your profit would double. Instead of $80,000, you’re looking at $160,000. In simplistic terms, your opportunity cost of not getting a hard money loan is $80,000. Will you pay $80,000 in private money loan fees, eating up all your profits? No. The cost will be far less, especially as you’re gaining experience to flip deals quickly.

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Private money loan costs and fees

  • Advances: A lender may advance you money for a variety of reasons. If there are multiple lienholders, it may be to get another part of the loan current. Or perhaps to cover unpaid taxes, legal fees and more. You should expect the lender to add a fee to the balance of your loan for doing so, in addition to interest.
  • Default interest: A defined interest rate that is higher than your regular loan interest rate. You will only pay this if you default on the loan or a loan covenant. Your loan contract should clearly and specifically spell out under what circumstances this takes effect. The loan servicer and lienholder may split this fee, the loan servicer because they incurred additional operating costs chasing you down. The lienholder because they didn’t get their money back on time.
  • Document preparation fee: A flat fee the lender charges to prepare your loan contract and documents. Sometimes this fee goes to the lender or a third party that created the documents (if there is one).
  • Foreclosure fees: You should only see these if the lender must foreclose on your property. Foreclosure fees encompass a variety of costs. This may include attorney, recording and statutory fees – anything the lender must pay for the honor of repossessing your property. The lender will add these fees to your loan balance. If your loan is full-recourse or has a personal guarantee, and the sale of the property is not enough to cover, you may still have to pay them.
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  • Interest rate: Paid to the private investor on the loan as the cost of you continuing to use their money. The length of the loan will have a dramatic impact on the rate. To make a bridge loan worth the lender’s time, you will see a much higher rate than a longer-term loan.
  • Late fees: A flat fee you will incur if you don’t make your payment on time. This is typically split between the loan servicer and investor.
  • Legal and advisory fee: Although a lender will often include them in your underwriting fee, you will sometimes see these as a separate line item. They cover the lender’s cost in hiring an attorney to prepare or review parts of the loan.
  • Loan servicing: Although typically a percentage of the balance, you will sometimes see loan servicing as a separate fee added to your payment. This is paid to the lender or a third party, whoever is servicing your loan.
  • Points: a percentage of the total loan amount you are requesting, paid as a flat fee. You should expect it to be at least three points higher than a bank would charge. Points are typically split between the private lender and private investor, if any. They will vary according to the loan length and loan amount.
  • Processing fee: A flat fee for the loan processing, sometimes paid to the lender and sometimes paid to the third party that processed the loan file.
  • Referral fee: Paid to the person, if any, who referred you to the lender. If you see this as a line item on your loan when no one referred you, watch out! Pro tip: PMLG takes no referral fees for connecting you with the lenders in our directory.
  • Renewal fees: Many private loans have short maturity dates, which you should be aware of when choosing your loan program. If you have paid your loan on time and your contract contains provisions for this eventuality, the lender may allow you to “renew” your loan to extend the maturity date if you are not yet ready to pay off the loan. These are typically split between the private lender and private investor and may include flat fees and points.
  • Underwriting fee: Paid to the person who originates the private money loan. This may be the private lender, private investor, or third party hired to create the loan. The fee is typically $750 to $2,500 depending on the loan’s complexity, and is sometimes incorporated into the points.
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