When it comes to identifying the best lender for you, keep an eye out for red flags. Hard money lenders in Michigan don’t have to adhere to the same regulated standards and disclosures as conventional lenders. So there’s room for hard money lenders to “work the system” in their favor, if they’re short-sighted. Most hard money lenders are legitimate, though, and want to create a win-win situation. Green Block certainly does. So when you’re choosing a lender to work with it’s important to know what to look out for. The following are some red flags that, if heeded, may help you avoid the wrong lender.
The terms seem too good to be true
As the cliché goes…if something seems too good to be true, it probably is. Some predatory lenders “loan-to-own.” This means that they lend as a strategy for acquiring properties. A sketchy lender will purposely make their loans attractive and easy to qualify for, knowing that a borrower likely can’t make their payments or pay off the loan in time. They simply approve the loan, sit back, and wait to foreclose. If it seems to good to be true ask more questions.
The lender doesn’t have or won’t share references
A lender that can’t provide references may be hiding something. Ensuring that a lender has a strong track record and happy clients is just as important as the loan terms they offer. A loan might look fantastic on paper, but if your lender provides terrible customer service, doesn’t move quickly enough for your deals, or drops the ball when it comes to servicing, it might not be worth the hassle.
The rate violates usury laws
Due to the higher risk they carry, hard money loans also carry higher interest rates than conventional loans. But most U.S. states limit the maximum interest rate a hard money loan can charge. If the rate you’re offered is higher than your state’s usury laws, move on. If a lender is ignoring the law, chances are they’re cutting corners or gouging you in other ways as well. Usury limits vary from state to state, and also depend on the type of loan being offered. Be sure to review your appropriate state’s laws. If you’re unsure, consult a real estate attorney familiar with the particular state’s usury laws.
Not all fees or terms are disclosed or explained
Showing up at your closing only to be asked to sign a personal guaranty you didn’t know about, or to pay extra fees you hadn’t anticipated, is not only aggravating, but also could render your deal unprofitable. If your lender isn’t willing to discuss or disclose all requirements and fees upfront, walk away. Review your closing/HUD statement carefully before signing the loan documents to ensure nothing has been slipped in without your knowledge.
The lender isn’t responsive
Successful real estate investors know that speed matters. If your lender isn’t able to keep up, you may lose out on a deal. When communicating with a new or potential lender, pay attention to how quickly they respond to your calls, emails, or texts. If it takes days to hear back, it may be a sign that they won’t be available when you need them most.
Trust your gut. Avoid these red flags. If something doesn’t seem right with your lender, maybe you should reconsider your funding source. Want to dig deeper? Ask questions if anything feels off or you’re unsure. An honest lender will answer you whether your questions are basic, advanced, or both. And there are many upstanding lenders in the marketplace. Taking the time to find the one who makes you comfortable is worth the effort.