Have you ever noticed how easy it is to go online and get 10 different quotes for a mortgage product? It is possible because closing costs are fairly uniform for conventional loans. The same cannot be said for hard money loans. You would be hard-pressed to find side-by-side hard money comparisons on a website for this very reason.
Closing costs are not uniform in the hard money arena. There are numerous reasons for this. Suffice it to say that most hard money loans are made on a case-by-case basis, only after lenders figure out exactly what they are working with and how they stand to make the desired margin.
Strict Rules vs. No Rules
The starting point for this discussion is understanding that conventional loans are subject to very strict rules that determine how closing costs can be structured. Take a conventional mortgage, for example. Lenders are required to follow rules established by federal law to regulate mortgage-backed securities.
As such, lenders can create formulas for determining closing costs that are applicable across the board. All a borrower has to do to get a ballpark estimate is plug in a few numbers and let an algorithm make the calculations. Closing costs will be static in accordance with the rules.
Things are just the opposite for hard money. There are no rules regarding closing costs. Each lender assesses closing costs on an as-needed basis, explains Salt Lake City’s Actium Partners. Some loans have a long list of closing costs attached; other loans have no closing costs at all.
Different Kinds of Closing Costs
The other thing to remember is that there are different kinds of closing costs associated with different types of hard money loans. Whether it’s a hard money lender in Utah like Actium Partners or another lender in New York, hard money loans are generally divided into a few set categories – like fix and flip loans and real estate development funding.
Within each of the categories are a number of different closing costs that are incurred through the process of approving and funding a loan. Here are just a few examples:
- Origination Fee – A fee charged (usually as points) to cover the costs of putting a loan in place.
- Appraisal Fee – A fee to cover the cost of appraising a piece of collateral, obtaining a broker’s price opinion, or doing a competitive market analysis.
- Document Fee – Some hard money loans require an excessive amount of documentation. Lenders may charge a document fee to cover the costs of drafting loan documents.
- Wire Fee – In cases in which the lender’s bank charges a fee for transferring funds electronically, that fee might be passed on to the borrower as a wire fee.
- Legal Fees – Closing costs often include legal fees that cover the costs of attorney review, making changes to a deed of trust, etc.
There are many other potential closing costs not listed here. The main thing to remember is that closing costs vary by loan type and circumstances. There are no standards in hard money lending. As such, lenders must have the flexibility to assess closing costs in whatever way works best for them at the time.
Negotiation is Always Possible
Banks and hard money lenders differ in the way they assess closing costs. There is another difference as well: hard lenders are more open to negotiation. Remember, certain closing costs associated with conventional loans are set in stone. They are a matter of federal law. Not so with private lending. That is why they are not uniform for hard money loans.
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