It’s not always easy to determine if a hard money lender is actually a scam, but there are several surefire ways to be almost 100% sure!
It seems like every few months, I hear about more hard money lenders trying to scam their investors. While these lenders may seem like the perfect solution for those looking to make a quick, large cash infusion, they end up creating more problems than they solve. It can be overwhelming when you’re looking for a new lender; how can you know if your lender is trustworthy? Is there a trick to avoiding hard money lender scam attempts?
The best way to find a trustworthy hard money lender is by word of mouth referrals and doing your due diligence. Legitimate lenders will have a strong web presence with reviews and give multiple references. They’ll also have set policies with transparent terms and requirements for their approval process that should be readily available for potential applicants.
That all sounds easy enough, right? Yet hard money loan scams are still happening to this day. So let’s break down just what a hard money loan is and is not, red flags to keep an eye out for, and a few tips for how you can quickly vet your potential lender before applying.
The Difference Between Hard Money and Traditional Loans
Before we dive into the methods scammers use, let’s first make sure we’re all on the same page. Hard money loans are excellent tools for real estate investors who need money for fix & flips or gap financing, but they’re not a mortgage, and it’s important to understand the difference to know what sort of loan you really need.
- Hard money loans have short time frames. Most loans don’t go over five years.
- There’s no credit check for a hard money loan. Lenders instead rely on your collateral to mitigate risk.
- Hard money loans have a higher interest rate. Since they’re such short loans, the interest rates are higher than a traditional mortgage.
- Hard money loans are rarely for the entire purchase price. Loans are rarely based on the current appraisal but instead the After Repair Value (ARV). While we offer 100% financing, most lenders will only provide 60% – 75% funding.
- Hard money loans are used for rehab costs. Traditional mortgages are used for purchasing the property.
- Hard money loans are funded quickly. Typically you can expect funding within a few weeks, whereas mortgages can take longer and have a more stringent application process.
The Signs You’ve Found a Hard Money Loan Scam
Suppose you’ve found a potential lender, but something just seems off, and you’re hesitant to send over your application, but you’re not sure why. First, always trust your intuition. There are many hard money lenders out there, so you’re bound to find one that won’t set off your alarms. But if you’re still not sure, here are a few signs that you can use to say, “Yep, this is a scam.”
Unreasonably-low interest rates. If the interest rate seems too good to be true, then it’s probably a bait and switch situation where you’ll be hit with much higher rates at closing. Hard money lenders charge a higher interest than traditional lenders to make up for the risk they take, not relying on your credit history. To give you an idea of what’s standard, most lenders will charge anywhere from 5%-18% interest depending on their policies and your application. Anything under 5% for someone who has no pre-existing relationship is likely a scam.
No collateral is required. Hard money loans are secured by adding a first position on the title until the loan is paid in full. If you’re unable to pay off the loan, the lender can seize ownership of the property. This is a fairly common requirement; I’ve never seen another legitimate lender not insist on this for approval.
There are spelling or grammatical errors in their legal docs. I’ve probably made a few errors on this blog that would make Grammarly blow a gasket, but there’s no room for error when it comes to our legal documents. If you see typos, grammatical errors, poor English, or other red flags in a legally-binding agreement, run for the hills.
There’s no idea of where they operate. Lenders are accountable to the legal requirements of each state in which they want to operate instead of an umbrella, federal entity. Consequently, very few hard money lenders work in all 50 states, and legitimate lenders will explicitly lay out the states in which they can finance hard money loans. If you cannot find this information or they’re being vague (i.e., “Serving the Northeast” but no explanation as to what states are considered to be part of this “Northeast.”), then look elsewhere.
No disclosure of fees. If there are hefty application fees or other fees that aren’t disclosed before moving through the final steps, consider going to another lender. As a loan recipient, you have a legal right to know your loan’s interest rates and fees before agreeing to close.
What Should You Look for In a Hard Money Lender?
So now that you know what are the major red flags of a hard money loan scam, here are a few ways to ensure you’re working with a legitimate, professional company.
They have a solid web and social media presence. Lenders know that you’re looking for them online, so they want to make it as easy as possible for you to find. While not all lenders are active on social media, most have professional, regularly-updated websites that have quick access to their terms, fees, and applications.
They operate in your state. Not all lenders are legally allowed to finance hard money loans in your state. Their website should list the states in which they operate, but if you can’t find that information, reach out and ask. They should be able to provide a list to you reasonably quickly.
They specialize in hard money financing. When looking for hard money or gap financing, seek out companies that specialize in this type of funding. You might think it’s a good idea to go to a lender that offers a little bit of everything, but you might get talked into another one of their products which might have lower risk or be more profitable. If you know you want a hard money loan, then stick to working with the pros.
The only way to ensure that you are not being scammed is to do your due diligence. Some of these scams are blatantly obvious, but some are, unfortunately, quite well done. When you’re looking for a hard money loan, keep this guide handy so that you’ll have a quick reference for what warning signs you should keep an eye out for.