Hard money lenders are often accused of being loan sharks, but in reality, they are respectable small business owners who make above-the-board asset-secured loans and conduct due diligence into their borrowers. However, this doesn’t mean that everyone who claims to be a hard money lender actually is one. It’s important to watch out for less reputable “lenders” who are actually brokers, or complete frauds. In this blog, we’ll share the first five red flags to watch out for:

1. The lender requires a large upfront payment. One of the most common lending scams is for a lender to claim that he or she needs a large amount of money in an untraceable form of payment from the borrower at the very beginning of the process. In part, this is because reputable hard money lenders also ask for fees as part of the application and underwriting process; however, a real lender will only ask for small amounts to cover appraisals or other due diligence. The larger costs of the loan transaction will be rolled into the final loan amount rather than required to be paid out-of-pocket.
2. Misspellings or poor grammar in offer and term documents. This is usually an indication that the “lender” is not based in the U.S. This is one reason that it’s safer to deal with local lenders who you can meet with in person.
3. The lender offers unsecured loans. The “hard” in hard money refers to hard assets, as in real estate, so hard money loans always require some form of collateral to secure the loan and alleviate some of the risk for the lender. An unsecured loan leaves a lender with next to no recourse if the borrower doesn’t repay, so be wary of lenders who offer them, especially unsolicited.
4. The lender offers too many different types of loans. Legit lenders almost always specialize in one type of funding, such as business loans, personal loans, home loans, car loans, hard money loans, etc. If a lender claims to fund numerous types of loans, it can be a sign that they’re just trying to cast as wide a net as possible for their scam. This doesn’t mean hard money lenders who offer loans for various situations or kinds of properties are running scams, as these loans are all types of hard money loans.
5. The lender promises extremely low interest rates. If a non-bank lender offers a loan with interest rates of only 2-4%, 0% APR, or doesn’t require monthly payments (even interest-only ones) during the term of the loan, then it’s likely a scam as real private lenders rarely match bank or credit union interest rates.

As these red flags show, it’s just as important to conduct due diligence on your hard money lender as it is for any potential real estate investment. Your best bet is to find a lender that is professional and local so that you have the opportunity to deal with them in person. Check out part 2 of this blog for the rest of the red flags to watch out for.