MAKING OF A COMMERCIAL HARD MONEY LOAN

1. Borrower with 520 FICA score and vacant restaurant building in a town of 5,000 people in South Dakota contacts a mortgage broker with the idea that he somehow qualifies for an 80% LTV, 4.5% interest, fixed-rate 30-year loan, with no personal guarantee.

2. After the mortgage broker informs the borrower of reality, the borrower contacts 23 other mortgage brokers getting the same answer
The borrower then places his loan request on an online loan website, where he comes in contact with a brand new inexperienced broker who tells him what he wants to hear.

3. The broker spends the next 6 months shopping the loan to 157 lenders, 135 of which are actually disguised brokers, and all of which turn down the loan after a cursory look.

4. The mortgage broker then finds a lender “willing to consider the loan” but needs a $12,800 fee upfront. The borrower pays the fee, the deal gets to 2 days from closing when the lender suddenly discovers a problem and can only close if the interest rate goes from 4.5% to 17.5%, points go from 2 to 11, and the borrower putting up his personal residence as additional collateral.

5. Since the newbie mortgage broker advised the borrower to obtain the $12,800 fee, appraisal cost, survey cost, etc by not making current note payments, the borrower is now in loan default and a preliminary notice of foreclosure is filed by the current lender. This eliminates borrowers from being able to borrow from anyone except a true hard money lender.

6. Borrower return to the first mortgage broker who asks the borrower for supporting documents. Since the borrower is two years behind on filing his tax returns, another 9 weeks pass before his financial information is available. The package is submitted to a hard money lender, who offers a 12-month loan at 12% interest and 4 points.

7. The borrower “shops” the offer until his property is 72 hours from foreclosure. The borrower then engages a bankruptcy attorney to file bankruptcy, 18 months have past and the borrower still needs a loan. Only now he loses most of his equity to fees charged by the bankruptcy attorney, bankruptcy trustee, and the prior first lien.

8. The borrower obtains an “ACH” cash flow loan. Although he thinks he’s paying 13% interest, in reality, the interest is 78% annualized, all due even if paid off early.

9. Since the borrower can’t make the $5643.33 weekly ACH payments, he contacts the mortgage broker who sets up the hard money loan. Because of the greater risk, the loan is now 16% with 6 points.