Hard money loans, sometimes called private capital loans, can be a powerful tool for commercial real estate borrowers. Whether you need capital quickly to close on a great deal, pay off a loan coming due, or pull cash out of an existing property, hard money lending offers flexibility that traditional banks simply can’t match.

However, not every lender who claims to offer these loans is the real deal. While legitimate hard money lenders are respectable small business owners who make above-board, asset-secured loans and conduct thorough due diligence on their borrowers, the industry also attracts brokers misrepresenting themselves as direct lenders and outright fraudsters. Knowing the warning signs of fraudulent activity could save you thousands of dollars and a great deal of frustration.

12 Loan Fraud Red Flags

So how do you tell a trustworthy lender from a scam? Below are 12 common red flags to watch for before signing anything or handing over a single dollar. Whether you’re a first-time borrower or a seasoned investor, doing your due diligence on a lender is just as critical as doing it on the property itself.

1. The Lender Requires a Large Upfront Payment

One of the most common lending scams is for a lender to claim that they need 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 loan application and underwriting process; however, a real lender will only ask for small amounts to cover appraisals or other due diligence. The higher 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 whom you can meet with in person. Loan documents are legal contracts, and sloppy language in them can be just as problematic as sloppy grammar. Whether it signals a foreign scammer or simply an unprofessional operation, it is a sign that you should look elsewhere.

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.

If a lender is willing to loan money without collateral, it may also be a sign that they intend to profit from fees rather than interest, which is a common characteristic of fraudulent lending operations.

4. The Lender Offers Too Many Different Types of Loans

Legitimate 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 2-5%, 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. Hard money lenders charge higher rates because they take on greater risk and provide faster, more flexible financing than traditional lenders can. That risk has a cost, and any lender claiming otherwise should raise serious concerns.

6. Loan Approval Is Guaranteed Without a Credit History Check

Hard money lenders will overlook past credit mistakes, but this doesn’t mean that they won’t ask about them. Hard money lenders want to profit from interest on repaid loans, not be forced to foreclose on properties they don’t want to manage or own. Be especially cautious of any lender who uses phrases like “guaranteed approval” or “no questions asked” in their marketing. Legitimate lenders take on real financial risk with every loan they fund, and that due diligence, including credit report checks, protects both parties.

7. The Borrower Must Decide to Accept the Loan Immediately

Reputable hard money lenders will provide a sheet of loan terms and a commitment letter that the borrower can take away with them before they decide whether or not to proceed with the loan. If the lender is pressuring the borrower to accept the loan on the spot, then it can be because the lender doesn’t want the borrower to be able to do any research into them or their business.

8. The Lender Has No Website

Reputable lenders have websites with information about their lending programs and recent loans they’ve closed, as well as the physical location of their business. This doesn’t mean that every lender with a website is legitimate, but be especially wary of those who don’t have a verifiable presence on the internet.

When reviewing a lender’s website, look for specific indicators of legitimacy such as a named team, a verifiable physical address, contact information, and examples of recently closed loans. A professional web presence alone is not enough if those details are missing.

9. Their Emails Are Sent From a Generic Account

Scammers are known for using Gmail, Yahoo, Hotmail, and other free email account providers rather than shelling out the money for an email with their company’s website domain name in it (e.g., name@company.com).

Borrowers should also verify that the domain in a lender’s email address matches their actual website. Scammers will sometimes use a handle that includes a company name while still operating from a free account, so always check the full address carefully.

10. The Lender Offers 100% Financing

Although borrowers who are new to real estate investing may be looking for ways to buy properties without putting up any of their own capital, this is rarely possible with reputable hard money lenders, but is often used by fake lenders to draw inexperienced investors in for either a bait-and-switch or a loan-fee scam. Offers like these are specifically designed to appeal to newer investors who are eager to get into the market without a large cash commitment. If an offer sounds like it solves every obstacle standing between you and your first deal, that is exactly when you should slow down and ask more questions.

11. The Lender Is Unlicensed

While hard money lenders are not subject to the same federal oversight as banks and other financial institutions, they are still subject to state laws, licensing requirements, and consumer protection rules. Licensing requirements vary by state, but a reputable lender will be transparent about what applies to them and willing to share that information. If a lender is evasive or dismissive when you ask about their credentials or compliance, that is reason enough to look elsewhere. Colorado, for example, has almost no requirements for a “business purpose” loan, but does require a license for lenders making “consumer loans”.  A consumer loan is a loan where funds are used for personal, family, or household purposes.    A “business purpose loan” is where all funds are used for business purposes. 

12. The Lender Is Unwilling to Provide References

Reputable lenders will happily provide references from past borrowers so that you can contact them yourself. Just as importantly, borrowers should actually follow through and contact those references. A scam lender may provide names as a bluff, counting on the borrower not to follow up.

As these red flags show, it is just as important to conduct due diligence on your hard money lender as it is on any potential real estate investment properties. Your best bet is to find a lender that is professional and local so that you have the opportunity to meet with them in person, verify their credentials, and speak with borrowers they have worked with before. Taking the time to do your homework up front can save you from a costly and frustrating experience down the road.

Tips to Avoid Being Scammed

Knowing the red flags is the first step to identifying loan scams, but protecting yourself from financial loss also means taking proactive measures before you ever sign a document or hand over any money. Here are six practical tips to help you find the right lender and avoid the wrong one.

Google the Lender You Are Thinking About Working With

Don’t just look at their website or other sites that are created by the lender. Look for other links that may have titles like: “XYZ Lender – borrowers who have been ripped off” or “XYZ Lender sued in District Court” and “XYZ Lender accused of fraud”, etc. Check specific sites like Yelp, the Better Business Bureau, www.complaintsboard.com, and www.ripoffreport.com. Do your internet homework and read reviews before you give money to a hard money lender.

Whenever Possible, Work With a Lender in Your Area

Not all cities have hard money lenders, but many do. Checking references for a local lender is much easier than for a national lender. Most of the really large hard money lenders operate nationwide and are able to afford substantial advertising and spend lots of money on getting the best positions in search engine lists. Just because a lender is near the top of Google with their own website doesn’t mean they are ethical or safe to deal with.

Be Wary When a Lender Asks for a Large Sum of Money Upfront

It is one thing to pay an appraisal deposit when you have a written commitment letter. It is another thing altogether to pay large upfront “due diligence fees” just to get a lender to “look at your request.” Use common sense in this matter.

Always Use an Attorney to Represent You

Although you will pay some legal fees, hiring an attorney is probably the best way to prevent being totally ripped off and losing not only a loan but also tens of thousands of dollars in upfront fees. Scam lenders have legal documents that they make you sign before they take your money, and once you sign them, you will almost never recover anything from the lender. Your attorney needs to review all documents before you sign anything and before you send a lender any upfront money. Don’t be penny-wise and pound-foolish when it comes to fraud prevention.

Ask Around About the Lender’s Reputation

Talk to your attorney, your CPA, real estate brokers, and your commercial banker. Don’t deal with a lender that no one has ever heard of or that has not gotten good recommendations from people that you know.

Find Out if the Company Is a Direct Lender or a Loan Broker

A direct lender controls the money and actually funds the loan. A loan broker takes a fee from you to put you in touch with a direct lender. On the internet, it is often hard to tell the difference, as many loan brokers hold themselves out as lenders. You should ask the company you are talking with to confirm in writing whether they are a direct lender or a loan broker. The difference can save you not only some fees, typically 1 to 2%, but also a lot of headaches. The good brokers will let you know clearly upfront what their role is in your loan request.

Work With a Lender You Can Trust

At Montegra, we believe that borrowers deserve transparency, honesty, and a lender who stands behind their word. As a Colorado-based direct hard money lender with over 40 years of experience, we have built our reputation on straightforward lending practices and lasting relationships with our borrowers. We encourage every borrower we work with to ask us the hard questions, check our references, and verify our credentials, because we have nothing to hide.

If you are looking for a hard money loan and want to work with a lender you can count on, we would love to hear from you. Contact us today to discuss your loan request and find out how Montegra can help.