Just like with traditional banking, each player in the hard money lending process performs a unique role to ensure a successful loan transaction. From application to approval, funding, and closing, there are various stakeholders involved at each stage. But, the private lending roles are noticeably different from what you would find in the banking sector. Understanding these roles will give you a clearer picture of who does what.
Read on to find out what each person does and why it’s critical to the entire process.
The Hard Money Lender
A hard money lender is usually your first point of contact in the whole private lending process. They may be a corporate entity or an individual, and their goal is to connect you with the right private loan for your desired investment.
Every aspect of the loan from start to finish is handled by them. Where the lender is an individual, such a person will be a highly skilled professional that is good at multi-tasking and handling all aspects of this business unlike in the banks where different staff handles different roles.
The hard money lender will do the following:
- Guide you in filling out your application. After that, they will create your loan package which will include details of your credit status, income, and assets.
- Gather and review title information.
- Work with you to evaluate your investment needs and advise you on the best loan option.
- Order for a property appraisal and review the appraisal report.
- Oversee the necessary title and escrow services as required.
- Provide you with details of all federal and state disclosures as required by law.
- Keep you updated on your loan status at intervals.
- Underwrite the loan and approve you file for funding by a private investor.
- Link you with a private investor to fund your loan.
- Appoint a loan servicer to receive your monthly payments.
- Create the final loan documents and coordinate loan settlement or closing.
The Private Investor
This party puts up the money to fund your project/investment. The private investor could be an individual or group of individuals. The lender may also decide to play a dual role as lender and investor, using his/her personal money to fund the loan.
The term investor is commonly used in hard money lending since the lender has to source funds from someone willing to invest in your loan. The investor may fund the entire loan themselves or gather the funds from other investors depending on how much money is needed. Such collaboration is known as a fractionalized loan.
Another common practice is when hard money lenders operate a mortgage pool and use this as a resource for funding hard money loans. With this arrangement, the broker or funds manager will assess each application and decide whether to fund it and then proceed to set the rates and loan terms in compliance with the previously fixed guidelines of that mortgage pool.
If your lender operates a mortgage pool, you can expect to get a faster decision on your loan application since the funds are already available and the lender doesn’t need to go out looking for investors.
The Title Company/Escrow Services Company
These two services are usually initiated simultaneously during the loan process. Depending on your location in the USA, different departments in the same company can handle these two services. Most states in the western USA allow this, but in the east, escrow services are termed “settlement services” and must be performed under the supervision of an independent attorney.
The Title Insurance Company.
Their role is to provide a preliminary title report on the collateral property. They get the necessary information regarding liens and other encumbrances against the potential borrower (you) from the county records. It’s best you come clean with any defects in the title to your property to make the process faster.
Any problems at this stage could terminate the loan especially if you withhold information because the lender will make their decision to underwrite the loan based on the report. If there is no hindrance, then the transaction can proceed and the property will be insured to protect the investor from losses on the asset.
The Escrow Company or Settlement Services Provider
The lender will ensure the funds are wired to the appointed escrow or settlement services company when due. This company is a third party in the loan transaction. They will receive and disburse the money as detailed by the investor. In addition, the escrow company will oversee the sign off at the closing stage (normally at their office), and ensure proper recording of the deed documents at the appropriate county offices.
The Property Appraiser
A licensed appraiser will prepare a detailed evaluation of your collateral. The appraiser will consider factors like the structural condition of the building, location and comparable sales price of similar properties, etc. before arriving at a value. The finished submission is known as the appraisal report. This document is for the information of the lender and investor only, but you can get a copy for yourself if you so wish.
Note that appraisals are expensive to conduct and the investor will not always ask for one. In the alternative, he/she may visit the property themselves to get an opinion of the value or opt for a BPO. The BPO is short for broker price opinion and is a summarized and cheaper version of an appraisal. It is prepared by a local real estate broker and if expertly done will also give an accurate, if not better, value estimate.
The Hard Money Loan Servicer
The loan servicer is responsible for collecting your monthly payments, sending year-end tax reports on paid interests, and providing periodic loan statements. If your loan terms dictate that taxes and insurance should also be collected every month as part of your monthly payments, the loan servicer will keep the funds in escrow and pay as due. The lender, investor or even a neutral third party company can serve as the loan servicer.
Clearly, every stakeholder in this transaction has an important contribution to make to the success of the whole endeavor.