Have you heard a private or hard money lending company state that they are a direct lender and wondered what that means and why it matters. In this article, I’ll explain what makes a lender a direct lender how it affects the loan process and how to find direct lenders that offer private mortgages for both commercial real estate and residential investment properties.
Are you an investor or broker here you can easily find direct private hard money lending companies if you’re in the investment real estate business and want to gain insights into private mortgage lending easily reach out to a direct online lender on privatelenderlink.com and get notified every time there is a release a new topic. Hence the meaning of a direct lender is subjective and you may hear several different opinions on this topic
The easiest way to define a direct lender is a loan originator that funds loans from their own balance sheet meaning they have the funds in their bank account and they wire the loan amount at closing however it’s not that simple while there are many private mortgage loan originators that do fund loans using their own balance sheet there are a few other capital structures used in private lending which in my opinion are still direct lending.
If a loan originator is not funding the loan from their own bank account they are likely using one of three capital structures to fund the loan the first structure is what I call one investor one loan the loan originator underwrites the deal and one high-net-worth. individual investor or family office will wire the funds at closing, these investors only work with loan originators so you can’t borrow from them directly
The second structure is syndication meaning the loan originator underwrites the deal and raises capital from multiple individuals or family office investors who all wire a certain fraction of the loan amount at closing and the third structure is a capital partnership with another private lending company in this scenario both the loan originator and the capital partner underwrite the deal together and the Capital partner wires the entire loan amount or the majority of the loan amount at closing in all three of these scenarios the loan originator is not using their own balance sheet to fund the loan so you may argue that this is not direct lending.
However in my opinion it is still direct lending if one key condition is met and that is the investor or capital partner is not charging an origination fee also known as points when the lender is ready to commit to your loan they will provide a term sheet or Loi and this document will state all the fees that the lender charges if the document shows that another company or entity is to receive an origination fee in addition to the lender who you’re communicating with that to me is not direct lending this scenario could be considered brokering but it’s more likely that the loan originator has a wholesale or corresponding partnership with a larger private lending company that also offers retail lending directly to real estate investors the whole topic of being a direct lender is mainly a concern for mortgage brokers but if you’re a real estate investor it may not matter because you won’t always get the best terms from a lender just because they are direct don’t worry so much about where the Money is coming from instead focus on the terms offered by the lender.
I recommend you get two or more term sheets and compare them you may find that the loan originator who has a capital partnership with another lender offers better terms than a direct lender because what typically happens in capital partnerships is the lender who is actually funding the loan will reduce their origination fee down to half of what they normally charge so that the loan originator can charge an origination fee as well and still make the loan fees competitive as a whole and if you try to circumvent your loan originator and go directly to that capital partner you likely won’t save any money.
so how does working with a direct lender affect the loan process and the time to close you might assume that working with a direct lender means that your loan will get funded faster but that’s not always the case loan originators who get their capital from multiple investors or the ones who have a capital partner may be able to fund just as fast as lenders who have a balance sheet there’s a lot of capital available in private lending these days serious investors and capital providers are ready to deploy their funds right away and don’t want to miss out on a good loan if there’s an urgency to close a loan in three days the lender should be able to tell you upfront if they can make it happen it doesn’t matter so much whether the loan originator is a direct lender or not so long as they can execute and get the loan funded on schedule if you’re looking for a private or hard money lender use some free resource online search for some private mortgage firms there’s no fee to search and also narrow your search to direct lenders you can view each lender’s profile to engage with them.
Also, its best to use capital partnerships for certain types of loans all lenders are only allowed to promote their direct private lending programs on some websites two search categories on the site have exceptions to this rule residential owner-occupied and small business lenders if you find the content in this page to be helpful please make use of the comment box to express your feeling.