Are you interested in learning more about hard money earnings beyond interest? For example, did you know private lenders also earn money from loan fees? The interest charged to the borrower for using the funds is the most typical source of earnings for a private or hard money loan investment. However, other possible revenue streams and methods to arrange loan agreements might result in a higher return than the interest rate listed on the promissory note. In addition, loan fees and deal structure can impact the return on investment in a hard money note.
Fees
Fees might be applied up front, upon loan origination, or over the life of the loan. The following are standard fees in which investors participate:
Points
The borrower pays points on a private money loan as part of their closing loan fees. As a yield improvement, it is usual for an investor to want .5% to 1% of the loan total.
Underwriting Loan Fees
A loan doc or underwriting fee is charged to the borrower to draw up the necessary legal agreements for the transaction. This closing expense can vary in price depending on the complexity.
Late Fees
Private money lenders (PML) charge late fees for failure to make a timely payment. Usually divided 50/50 with the investor. However, fees are often paid when the loan servicer collects them.
Default Interest
A higher interest rate applies if a borrower fails to meet the conditions of the note or a loan covenant. For example, the note rate might be fixed at 8%, but if the borrower breaches significantly, the rate could rise to 18%. Therefore, the parties should explicitly define default interest participation.
Renewal Fees
Commercial loans with shorter maturities are not unusual. If a borrower has been making timely payments, most lenders will most likely want to renew the loan. Loan renewals may include extra private money loan points and costs that can be split with the Private Money Lender. You and the private money lender can agree on how much of these renewal fees you will get.
The amount you get will be determined by several criteria, including:
- Desirability: If the loan has desired attributes, such as an extraordinarily low LTV ratio or a solid guarantee, the PML may have many investors eager to fund the loan, and the point share will most likely be negligible if provided at all.
- Relationship: The more loans you finance with a PML, the more probable you will get a percentage of the points. PMLs want long-term, dependable streams of investor funding since it makes their operations simpler. Once a PML understands your loan transaction preferences and yield requirements, the PML will begin designing loans to meet your needs.
- Risk: The riskier the loan, the more likely the PML will share upfront points to increase the investor’s yield and make it more appealing to fund.
- Funds: If a PML has more loans than investors, the PML would likely make loans more appealing by sharing points to attract additional investors.
- Borrower: The PML will pass on points to the borrower wherever possible. If the original loan was quoted at 3 points and the investor demands 1 point, the PML would undoubtedly try to raise the borrower’s charge from 3 to 4 points and pass one of those points on to the investor first. The competition in the market for the specific loan will determine whether or not the PML can boost the points for the borrower.
When choosing a private lender, inquire about their business management and the fees they are prepared to share with investors.
Other Fees for Hard Money Loans
In addition to the abovementioned fees, other fees may be associated with private and hard loans that are not included in the closing costs.
Extension Fees
When you agree on loan terms, the lender will expect the borrower to repay the loan within the set time frame, which varies based on the amount and terms of the loan. However, sometimes life can throw a curve ball, and unexpected things come up, and you may be unable to repay the loan in the specified time frame. In this instance, some private lenders may extend the loan adding an extension fee to the loan term.
Pre-Penalty Fee
Some lenders apply a penalty fee for late payments, while others charge for early payments. Most lenders anticipate that borrowers will try to pay their loans as quickly as possible, keeping the loan for the least amount of time to reduce interest. For example, if your loan term is one year, your lender may expect you to hold the loan for nine months. Repaying before the deadline prevents a lender from profiting from monthly interest. To ensure as much profit as possible, some lenders will charge a pre-penalty fee to ensure you do not pay off the loan too early.
Deal Structure
Aside from the points and fees, a note investment’s structure can significantly influence your yield. The structure of a new loan transaction is limited in its versatility. The funding amount is equal to the face value of the new promissory note, plus or less closing charges.
Term
When it comes to new loan originations, arranging the loan for the shortest possible term will give the highest yield. In addition, including built-in yield enhancers like renewal points and fees will extend your loan’s yield beyond the first period.
Discount
Purchasing existing debts will yield the highest return if the note is paid in full at or before maturity. For example, if a $300,000, 10% note is acquired for $240,000 and paid off in one year, the return is the 10% interest + $60,000 in additional profits received due to the reduced note purchase.
Increasing Earnings and Simplifying the Loan Process
As a private lender, the bottom line is to make good financial deals that will net you the maximum return. Understanding the fees associated with private and hard money loans may help you increase your revenue using additional lending fees beyond interest earnings. At Liquid Logics, we understand how important it is to ensure the loan process flows smoothly, which helps you, as a lender, be more profitable. That’s why we offer the most sophisticated hard money loan origination software on the market. Our software is designed to streamline the loan process from start to finish so that you can close more loans in less time. With our easy-to-use interface, you’ll be able to track every step of the loan process and stay one step ahead of your competition. We’re here to help you close more loans and grow your business. Contact us today to learn more about our hard money loan origination software.