The first item on your lending offer will be the funding you'll receive. Your lender will calculate this amount using the leverage ceilings from the lending policies. (For more info on this, check out our individual Loan Term Guides.)
Draws vs. Line of Credit
If your loan is for rehab or construction, you can receive funding towards your work costs. In this case, your loan will be divided into the initial draw (for purchase) and the rehab/construction draws. Lenders have a draw process, which is usually done in arrears. You carry out some of the work and show receipts and evidence of work done — sometimes including an updated mini-appraisal — and the lender will fund that portion in a new draw.
What's important to clarify is that your loan is not a line of credit. Hard money lenders work differently from banks, wanting as much of their funding deployed (and earning interest!) as possible. So, if your loan is a bridge or rental, you'll receive the total amount on day one. If it's a rehab or construction, you'll receive the total amount for purchase on day one and the total additional draws using the process described above.
Gross vs. Net
You should also know that the loan amount figure you see is "gross", which means that's not the number you'll receive in your bank account. A lender will take this figure and deduct any fees at closing, occasionally along with an interest reserve, to determine the "net" amount that gets sent to your attorney. For more details on these deductions, keep reading!
Most of your finance costs come from the interest you pay, so pay close attention to what follows. Put simply, the interest figure on your term sheet is the percentage of the loan amount you owe to the lender, typically expressed as a yearly figure. You usually pay interest monthly — directly to the lender or through their servicing company — so the figure you see is "simple interest", which means no compounding. So, if the figure is 12%, divide by 12 to see that you owe 1% of the loan amount each month. Simple, right? Well, not so fast.
Dutch Interest
If you get a rehab or construction loan, Dutch interest is the most important thing to be wary of. This is where a lender charges you interest on the total balance of the loan, including any undrawn rehab/construction funds.
Put simply, a non-Dutch interest loan can save you thousands of dollars, especially if the rehab portion of the loan is significantly large. One lender who charges you 13% non-Dutch can be cheaper than a lender who charges 11% Dutch! Only some lenders charge Dutch interest or solely to new borrowers. Equally, a "Dutch" lender may still be the best choice. But we want you to know what you'll pay going into a loan.
Interest Reserve
The second thing to be most wary of is an interest reserve, which can apply to all loan types. An interest reserve is where the lender retains a portion of your interest at closing upfront. Some lenders do this for a specified period (e.g. three months), whilst a few do it for the whole loan term.
Even if a lender is holding these funds in escrow, it significantly increases your effective cost of capital because you receive less money upfront. Still, you pay the same amount of interest as if you'd received it all. If you do not have significant cash reserves yourself, a lender may legitimately require an interest reserve to ensure they can get paid. However, if you are financially strong with a healthy balance of liquid assets, we recommend pushing against an interest reserve — especially on the whole loan balance.
Default Interest
The final thing to be mindful of is your default interest rate. You will owe this rate if you become delinquent on your loan, typically 24% (i.e. 2% per month). Some lenders will disclose this on your term sheet, whilst others will relegate this to your legal documents. However, every loan will have a default rate, and you should know what it is.
Why does this matter? Well, it's a lot of money to pay! If you anticipate being unable to pay the interest on your loan in a timely fashion, the best thing you can do is communicate honestly and upfront with your lender. A good lender always wants to see you succeed and hates foreclosing unless they have no other option, so they'll be incentivized to work with you to find a solution. In our experience, whether this happens in an investor's journey is a matter of "when", not "if". No matter how skilled an investor you are, you will run into an issue at some point, whether it's an unexpected cash flow crisis or a market downturn. Communicating well with your lender can be the difference between that issue being a mere "bump in the road" or when the wheels come flying off!
Along with interest, a variety of fees are owed that make up the cost of your loan. In many cases, fees are where lenders make the majority of the profit on their loans, so it pays to ensure you're paying the correct amount!
Origination Fee
Your primary fee is an origination fee owed to the lender at closing and due on the whole loan amount (including the rehab/construction portion, if applicable). The industry standard is a 2% origination fee, though we've seen many of our lenders drop this to 1.5% or even 1% of late.
If you're a new investor, you may have to pay a slightly higher fee on your first few deals to compensate for the additional risk. However, you should walk away if your lender is trying to charge you more than 3%.
You'll notice that there's no mention of a broker fee, and that's because we don't charge any. If you use a loan broker to find a loan, they'll generally add 1-2% on top. But again, if you're paying more than 3% in total broker and origination fees, you can certainly do better!
Underwriting / Doc / Closing Fee
In addition, your lender usually charges another fee to cover "administrative expenses" - typically in the $1,000-1,500 range. This has various names, generally called underwriting, doc(ument), processing, or closing fee. If they charge more than this, don't be afraid to ask why, and if they stack multiple "junk" fees, know that plenty of lenders keep things simple and transparent.
Application Fee
If that wasn't enough, some lenders also charged an application fee that was due whether or not the loan proceeded. We're not a fan of this practice, and though we know lenders often have to do work on deals that don't go ahead, you should not have to swallow that cost. None of the lenders on our platform charges an application fee, and if they try, please let us know!
Appraisal & Draws
Unless you're working with a local lender, you'll need to pay for an appraisal out of pocket ($400-$750 on a single-family home), which the lender will order. And if you are rehabbing or building a property, there's usually a per draw fee, which can range ($100-$400 per draw) depending on how the lender operates.
Legal & Insurance
Finally, there's legal and insurance, which you'll need to pay for yourself. This might sound like a lot, but thankfully, Hardback can help. When you receive offers on our platform, we summarise all fees and interest (except the ones you'll pay out of pocket: appraisal, insurance and legal) into one total sum to compare like-for-like against other offers.
The loan term is how long your lender agrees to lend you the money for. For short-term loans, the standard is 12 months; for long-term loans, the standard is 30 years. However, the loan term will vary from lender to lender depending on their internal policies and the project at hand. (For example, a multifamily construction loan is usually over 18-24 months.)
Repaying Early
In a best-case scenario, you might get a 12-month rehab loan but be ready to sell much sooner, say after six months. The good news is that you can usually repay construction, bridge and rehab loans early without incurring costs. Occasionally, a lender may set a minimum interest term of 1-6 months — but if you know there's a good chance you'll be able to repay earlier than the minimum interest threshold, you're probably best off finding a lender with a smaller threshold.
With rental loans, things work differently, which we cover in the Rental Loan Guide. To summarise, you typically have a prepayment penalty for an early repayment in the first 3-5 years, which you can request to waive by paying an interest premium.
Extending the Loan
What if you reach the end of your loan term and need more time to be ready or able to sell or refinance? This brings us to the most important term you won't find in your term sheet. Every lender will have an extension policy if you ask them, but you'll need to remember that it's never guaranteed.
Some lenders have a simple but unfortunate "no go" policy. Your loan is due at term and that's that. If you're a new investor, we suggest avoiding these lenders, as you have a greater chance of going over term than those with experience. The standard extension policy we come across is a three-month extension for a 1-1.5% extension fee, subject to the loan being current and the property in good shape.
Over 95% of hard money loans are made on a first-charge basis: you must provide the lender with a first lien over the property to get funding. Occasionally, if you own a high-value property with significant equity (e.g. a $1.5m home with a $500k loan in first position) and the first lien holder allows a second lien, you may be able to find a specialist hard money lender to help. But it's safe to assume you must give them a first lien.
Personal Guaranty
As our Introductory Guide discusses, a lender will only lend to an LLC, not to you personally. However, they will almost always require a personal guaranty, meaning your personal assets are not protected if they can't recoup your debt in foreclosure. That said, some lenders will waive this for a small fee once you reach a certain level of experience.
Additional Security
Finally, a lender may request a lien over one or more of your other properties. This is not standard but may arise where the deal involves some significant risk, or you have some personal credit issues. Or, you could be in an asset-rich but cash-poor situation where you need 100% financing. These loans are typically reserved for experienced or wealthy investors, but where there's a good deal to be done, this is a good way for the lender to get the security needed to get the loan over the line.
You may notice that there's more information covered in this guide than what you see in your offers on the platform. We don't want to bog you down with information when you first receive offers, so we ask lenders to summarise their term sheets for you to review and compare quickly.
However, once you choose your offer on the platform, you'll automatically get connected to the lender of your choice, who can email your term sheet to you — usually after an introductory call. Then, you'll be ready to use all that you've learned here to ensure the deal stacks up and you're comfortable proceeding.
