Hard Money Lender Types
Although hard money is a niche of the mortgage market itself, its lenders can be further divided into three categories: brokers, direct lenders, and some combination of the two. In brief, brokers lend other people’s money whereas direct lenders lend their own. Lenders who are a combination of both lend a bit of their own capital while also brokering funds from others. Alternatively, the money many not be owned by the lender, but the lender may have full control over its disbursement.
Hard money brokers organize capital from individual investors, conduct due diligence, analyze potential collateral and borrowers, and disburse funds. They may also service the loan by collecting periodic mortgage payments from the borrower or may arrange for a third party service to perform this function. In exchange for these services, the broker receives origination points –generally a percentage of the total loan amount distributed at closing. Hard money broker operations range from large to small.
As an alternative to brokers, direct lenders offer their own money. Consequently, they call all the shots with regard to lending decisions. In addition, by not having investors to report to, they may be able to act more rapidly. Additionally, truly direct lenders tend to be the most flexible regarding borrower and collateral property requirements as they can adjust rates and terms to compensate for any change in the risk of the mortgage. Direct lenders are typically wealthy individuals with sufficient capital to make multiple mortgage loans. Generally smaller operations, these lenders may take a more keen interest in their investments than brokers do, which may manifest itself in a “hands-on” approach.
Most hard money lenders exist in the gray area that exists around the categorizations of “direct lender” and “broker”. Some lenders operate on investor capital, but have full autonomy over those funds. Others broker individual loans directly to individual investors, and effectively make a single connection between one borrower and one lender.
The table below summarizes the different varieties of hard money lenders. Each of the lender types is described relative to other hard money lenders in general. In other words, even a “slow” lender in the hard money sector would be able to lend funds faster than even the most agile conventional lender.
|Autonomy||Low to Medium||High||None or High|
|Flexibility||Low to Medium||High||Low to High|
|Funds Availability||High||Low||Low to High|
|Speed||Moderate||Fast||Slow to Fast|