Find out the different types of lenders and how they
interact to fund hard money loans. This blog sheds light on the web of brokers
and lenders cooperating to fund a private hard money loan and their
relationship.
Borrowers usually do not distinguish between "Brokers,"
"Lenders," "Investors," "Direct Lenders, or "Referral
Lender"." Borrowers' goal is getting their loans approved and funded;
the term "Lender" could mean anyone who facilitates that goal.
Brokers define a lender as the entity that approves and funds the loan, i.e., a Direct Lender.
A direct Lender is the entity that approves and funds the loan. Direct Lenders don't always use their own money, but they have the ability to draw loan documents and fund loans from their controlled pool fund or Private Investors. Direct Lenders get the loan package directly from the Borrower or via an Originating Broker or Referral Broker. Sophisticated borrowers and brokers who shop for loans on behalf of their borrowers' clients always ask, "Are you a direct lender? " There are lots of benefits to Brokers shopping for loans to get a Direct Lender. Borrowers can sometimes fair better with an experienced loan broker who will eventually produce a better loan for the Borrower by shopping and negotiating the loan with multiple Direct lenders.
Loan Packages should minimally include a basic loan
application, credit report property profile, and information on the borrower
loan purpose and exit strategy. A complete loan package will have bank
statements, leases, and documented income information, like tax returns, explanations
of credit derogatories, preliminary title reports, and, if possible, appraisal
or BPO. Since many Direct Lenders require that they order the appraisal themselves,
loan packages are often presented to Direct Lenders without an appraisal report.
Are licensed individuals or companies who solicit loans,
process loan packages, and shop them to Direct Lenders. Experienced Mortgage Brokers
establish relationships with Direct lenders and know where to and how to
present the loan package most favorably. Mortgage Brokers could simultaneously
deliver the package to several direct lenders and negotiate the best rate and
terms on behalf of the borrowers. Brokers can also act as Direct lenders.
Brokers who are also Direct Lenders
Some Brokers can act as Direct Lenders for certain types of loans while being Brokers for other kinds of loans. It could happen that a lender, acting as a Direct lender, starts underwriting a loan with the intention of using his own private investors and then transfers the loan package to another Direct Lender who actually funds the loan.
Brokers Chains
A Broker-Chain
comprises an Originating Broker, at least one Referral Broker, and a Direct
lender. Broker- Chains are not necessarily bad and sometimes are the only
method by which the loan can close; however, the entities who are part of the
chain should know their exact position and exact compensation for their relative
work/ connection.
In the graphic, the total commission of 3.5% is split among the originating broker, the two referral brokers, and the direct lender. The commission split is different from loan to loan. It depend only on the agreement among the broker/ lenders on the chain.
Originating Broker
The Originating Broker is the broker who was first in contact with the Borrower. The originating broker creates a loan package and sends it to the direct Lender or to a referral broker/lender. Originating Brokers always try to reach direct lenders and avoid referral brokers. The reason behind it is to maximize their commission and have better control of the transaction. An apparent Direct Lender often who can't fund the loan could give up or sometimes become a referral lender; thus, a Broker Chain is created.
Referral Brokers (Referral Lenders)
Any broker or Lender part of the brokers' chain becomes a
Referral Broker. Referral Brokers can do a lot of underwriting work, gathering documents
and applications before presenting them to another lender or several lenders. In
some cases, the Referral brokers do not underwrite but only transfer a package already
prepared by another broker or the basic information submitted by the Borrower. The
Originating Broker is also always a Referral Broker.
Brokers Pretending to be Direct Lenders
Some Brokers mislead themselves as Direct Lenders to
attract business; this could create confusion and waste time as it creates a unanimous
broker chain.
Private investors are individuals who are using their
money to invest in loans. Private Investors are not directly connected to the
borrowers because of the licensing requirements, and they fund the loans via Direct
Lenders who underwrite the loans and arrange all the legal disclosures needed.
Some Private Investors with Broker/ Lender licenses could fund the Borrower,
but this is rare.
Wholesale Lenders are direct lenders who fund loans only through loan brokers. Wholesale lenders do not interact directly with the borrowers. Many wholesale lenders have a parallel Retail division that accepts loan applications directly from borrowers.
Retail lenders are Direct Lenders accepting loan
applications directly from borrowers and bypassing all broker interventions. Some
Retail lenders also have a wholesale division accepting loans via brokers.
It all depends on the loan complexity. With a simple loan
request going directly to a retail lender, the Borrower gets a direct
interaction with the money source, fast approval, and maybe saves a little on
the loan fees. With a complex loan, a good Loan Broker can
better present the loan request to the Lender via the wholesale division. A Broker
will also try several lenders instead of one to get the best possible rate and
terms.
Any broker or Lender part of the brokers' chain becomes a
Referral Broker. Referral Brokers can do much underwriting work, gathering documents
and applications that the Orinating Broker has not already collected. Once the
package is completed, they will forward it to one or more Direct Lenders. In
some cases, the referral brokers do not underwrite but only transfer a package already
prepared by another broker or the basic information submitted by the Borrower.
Mixed Lender definitions
Depending on their role in a loan transaction, brokers and lenders could have several designations applied to them.
For example, a Broker can be a Direct Lender, a Retail
Lender, a Wholesale Lender, or a Referral broker.
Loan Lending Cycle
A Lending Cycle
depends on the type of loan origination
Simple Borrower to Direct Lender
Borrower to Mortgage Broker
Borrower to Mortgage Broker with Referral Broker
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