There Is Money, but the Loan Don’t Close

The interesting contradiction to think about is that there is money available to lend, with hard money lenders especially wanting to make loans, but loan don’t close. Everyday, I am surprised by this situation. In a tight lending environment, you would think that when lenders want to lend and borrowers want to borrow, a match would happen. More often than not, it does not.

One of the major reasons I see for loans not closing is that borrowers do not have the right expectations. Borrowers think that if they have a decent credit and property profile, loans will be funded. That is not good enough in today’s environment.

In addition, borrowers don’t understand why private loans are so expensive. The primary factor is that the capital used to fund a loan is not insured by any federal agencies and not resold to other investors. If a loan is not repaid and the value of the property goes down, the lender assumes all of the losses. The interest rate charged to the borrower reflects the combination of this estimated risk and the availability of funds. Once the right balance between these two components has been found, the pricing will be determined. The number of points charged by the lender is a reflection of origination costs, loan management costs, an amount to cover the estimated risk anticipation of potentially having to foreclose on a property, and maximum the APR allowed by law.

Borrowers and real estate professionals should understand these different aspects of pricing a hard money loan. This will allow them to be better prepared (i) to get a loan approved, and (ii) to provide the best application possible to get better pricing. In addition to the two components mentioned above, other issues that will be considered are Loan to Value (LTV), property location, and property type. Each factor will have a potentially large influence on final pricing. If a borrower expects a first quote to be definitive, then this most likely will kill the deal because, with hard money lending, every detail counts and will influence the final price. Moreover, today more than in recent years, lenders are able to dictate what a loan looks, and borrowers and real estate professionals need to adjust their expectations to this major new reality or else like their loan won’t close.