Much of the work that goes into writing a hard money loan differs substantially from traditional lending. But there are some things about hard money that are similar. Take origination points. Also known as origination fees, they are part and parcel with hard money loans.
Actium Lending is a hard money lending firm based in Salt Lake City, Utah. They describe origination points as a representation of the fees that lenders charge for the service of ‘originating’ a loan. What does that mean?
Before Funding, Work Has to Be Done
As Actium explains, there is a lot of work to be done before a hard money loan is actually funded. Someone needs to go through the borrower’s application. In most cases, the collateral a borrower is offering needs to be appraised. Back in the office, underwriting occurs. Documents are prepared. Only after all the work is completed can paperwork and funding be sent to a waiting title company for closing.
Just like any other business, a private lender needs to pay to get this work done. There are employee salaries and vendor fees. There are office supplies, document fees, and so forth. Origination points pay for it all.
Approving and underwriting a loan are more or less lending services that only come at a price. But because they are separate from the loan itself, they need to be paid for separately. That is how origination points work.
Fees Paid at Closing
Origination points represent fees that are paid at closing. Though there are exceptions, origination points usually represent a percentage of the total amount borrowed. So one point on a $1 million loan would be equal to 1%, or $10k.
Actium Lending points out that origination points are different from discount points. Where origination points represent fees for work done, discount points represent a way to reduce interest rates by paying an extra fee upfront.
Some hard money lenders offer discount points and others do not. Each lender is free to do as it sees fit. If a borrower can negotiate a good deal on discount points, they could ultimately save quite a bit of money on total interest paid.
Lenders Are Different
Another similarity between hard money and traditional lenders is that each lender in the industry is different. And in fact, because hard money lenders are not tied to such rigid rules, regulations, and standards, you are likely to find even more flexibility from one to the next. What does this have to do with origination points?
Virtually everything in hard money is negotiable. Hard money lenders have their standards. They have their baselines from which they work. But most lenders are also open to deviating from what they normally do in order to accommodate a client.
If just one point separates a lender’s needs from a borrower’s goals, the two can usually work something out. Borrowers and lenders can usually come to agreeable terms with everything from interest rates to LTVs to payment terms. Very little is set in stone when it comes to hard money.
Do Your Homework
Hard money and traditional lending share some similarities and many more differences. As a borrower, it is up to you to do your homework before approaching a hard money lender. Hard money is a fantastic funding tool for certain types of needs. But it is not the best source of funding for every need.
From origination points to asset-based business models, there is a lot to know about hard money lending. If it works for your needs, it’s probably going to work very well.
