There has been increased demand for bridge loans (sometimes called hard money loans), which has led to a surge in the number of bridge lenders. While the vast majority of these are reputable lenders, it only takes a few dishonest lenders to make borrowers wary and give hard money lending a bad name. The most common loan scam encountered in this niche of the lending world is the upfront-fee scam. As a borrower, one way to protect yourself against such scams is to arm yourself with knowledge of how the bridge loan approval process should work. That way, if you encounter a lender who doesn’t follow it and seems too good to be true, it will raise a red flag for you.

Hard Money Loan Approval Timeline

Here’s a typical example of how your loan request should proceed:

1. Application: You submit your loan application materials.
2. Preliminary underwriting: The lender conducts a preliminary review of the loan application materials to determine whether the project meets the lender’s loan guidelines.
3. Term sheet: Once the lender finishes the preliminary underwriting, a letter of intent will be issued to the borrower that states the terms for the loan being offered as well as any final items needed from the borrower to fund the loan. (Note: A letter of intent is not the same as a loan approval and does not guarantee funding.)
4. Commitment Letter: If the borrower agrees with the terms offered, then a commitment letter is issued and the final items need to be provided to the lender in a timely manner.
5. Property Inspection: If the borrower agrees with the terms offered, then the final items, which usually include a property inspection, need to be provided to the lender in a timely manner.
6. Closing: The lender funds the loan and a title company is used for the closing.

What makes upfront-fee scams difficult to spot is that once a lender finishes the preliminary underwriting stage of the process, even legitimate lenders will typically charge a fee to cover the costs incurred in the latter stages (especially the property inspection stage) in case the borrower doesn’t go through with the loan once it’s offered. Borrowers should watch out for lenders who issue term sheets too quickly (without taking adequate time to conduct preliminary underwriting), with unbelievably low interest rates (hard money interest rates are almost always higher than those charged by banks, ranging from 9% to 15%), or charging an unreasonable upfront fee (reasonable fees will range from $1,500 to $7,500; a fee of $15,000 to $25,000 is unreasonable except in the case of massive multi-million-dollar developments). If you feel a bridge lender’s fee is suspiciously high, then you can ask them to give you an accounting of the tangible costs behind that fee. A reputable lender will gladly explain these. However, you should never feel obligated to stick with a lender who asks for excessive fees.

It always makes sense to Google your potential hard money lender. If you find various websites that are called “Borrowers suing XYZ Lender” then that obviously is not a good sign. A reputable hard money lender should not have many critical comments under their name.