While traditional mortgage lending is a fantastic and reliable way to earn a living — people will always need housing — there is a lot more earning potential to be had via alternative lending options. As one develops their career as an originator, it’s important to consider adding options for hard money and private loans to an income-producing toolbox.
Not only will this broaden and deepen your client roster, it also will impact the bottom line. Mortgage originators made more than $82,000 a year as of this past August, according to a survey from employment search engine Indeed. And the originators who offer private and hard money loans can see their income expand far beyond that — the sky is the limit.
If the increase in income potential is not sufficient motivation for considering an addition to your product offerings, there are plenty of other benefits to consider. A broader portfolio of product offerings means fewer missed opportunities for your clients, and happy clients lead to increased referrals. Diversifying your offerings also helps diversify your expertise, helping increase your visibility in a competitive industry. Who doesn’t want to be an industry leader?
Understand the basics
Before diving right into alternate types of lending, it’s important to have a solid understanding of what hard money is and how it differs from conventional lending. Conventional loans are offered based on the perceived ability of the borrower to repay them.
This is where credit scores, borrowing history and debt-to-income ratio are taken into consideration, affecting the total amount that can be borrowed along with helping to determine the interest rate on the loan. Conventional loans require borrowers to jump through lots of hoops and then sit around waiting for someone (or some algorithm) to decide whether to approve the application.
For lots of people looking to make a major purchase, a few hoops and a little wait-and-see are fine. They can finish their rental term, stay with friends or have a couple of months left in their current living situation before things need to change.
For others who have situations that are more urgent and require immediate action, conventional loans are not the right solution. For example, if the perfect investment property hits the market, a potential borrower with other projects in progress or less-than-stellar credit might look overextended and get denied. Someone else swoops in and buys the property while the client tries find a way to make things work. That’s bad news for everybody.
With a hard money loan, lenders make decisions based on the value of an asset used to back the loan, known as collateral. If the borrower defaults, the collateral can be liquidated to cover the loan.
Another difference between conventional and hard money lending is the length of the term. For example, conventional mortgages amortize the amount borrowed over 15 to 30 years — sometimes even up to 40 years. Hard money loans are much shorter and must be paid back within months or a few years, rather than decades. Interest rates are typically higher for these loans as well to balance out the risks assumed by the entity extending the loan.
Learn the details
The best option for education on this type of lending is to find a mentor. If possible, connect with more experienced originators in your organization and ask them to loop you in on the details for their next hard money loan.
If these products aren’t offered in-house, reach out to successful lenders in your area. Personal relationships create direct routes for getting questions answered, but if finding a mentor just isn’t possible, don’t worry. In this information age, web platforms offer a wealth of knowledge. If you’re not the research type, look for conferences and mastermind programs that offer training in this area. The upfront cost of gaining information might be significant, but the potential to recoup that expense is huge.
When the time comes to make your first hard money loan, connect with other local professionals who serve your ideal potential client base. Connect with the real estate professionals, certified public accountants, bookkeepers and investment groups in your circle of influence, and let them know about adding this option to your lending menu. An originator’s established relationships are likely to be the first and best source when it comes to generating business with new offerings.
With a few loans closed, invest in an external review of processes to find ways to increase procedural efficiency without going out of compliance. In building your business practice, stay small — don’t get over-extended with high-risk loans. Create a solid foundation of more predictable, conventional loans while determining how much bandwidth is needed for these hard money offerings. And when you’ve got a handle on it, take a much-deserved vacation.