Direct Lender Explained

Have you heard a private or hard money lending company state that they are a “direct lender” and wondered what that means and why that matters? In this guide, we'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.

How to define Direct Lender?

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 originators that do fund loans using their own balance sheet, there are a few other capital structures used in private lending which, in our opinion, are still direct lending.

If a loan originator is not funding a loan from their own bank account, they are likely using one of three capital structures to fund the loan.

  1. 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.
  2. Debt Syndication
    The loan originator underwrites the deal and raises capital from multiple individual or family office investors who all wire a certain fraction of the total loan amount at closing.
  3. Capital Partnership
    The loan originator partners with another private lending company that has a balance sheet to fund loans. 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 3 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 our opinion, it is still direct lending if one key condition is met: The investor or capital partner is NOT charging an origination fee (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, that is not direct lending. 

This scenario could be a brokered loan, but it’s more likely that the loan originator has a wholesale or correspondent partnership with a larger private lending company that also offers retail lending directly to real estate investors. Many in our industry consider wholesale partnerships to be brokering. Other terms to describe this include Table Funding, Correspondent Lending, or White Label.

Does it matter if a lender is direct?

The whole topic of being a direct lender is mainly a concern for mortgage brokers. If you’re a real estate investor, it may not matter as much since 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. Focus on the terms offered by the lender. We 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. What typically happens in capital partnerships is the larger lender who is actually funding the loan will reduce their origination fee down to half of what they normally charge so that the smaller lender (loan originator) can charge an origination fee as well, and still make the total fees competitive.

If you try to circumvent your loan originator and go directly to the capital partner, you likely won’t save any money. The capital partner will just charge the same

How it affects the loan process and time to close

You might assume that working with a direct lender means 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 is 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 direct or not, so long as they can execute and get the loan funded on schedule.

How to Find Direct Private Mortgage Lenders

If you’re looking for a private or hard money lender, use our website PrivateLenderLink.com as a resource. There is no fee to search, and almost all the lenders you’ll find on the site are direct lenders. You can view each lender’s profile to learn about their guidelines, and reach out to them directly.

Being a direct lender is the main requirement for private mortgage lenders to be listed on our website, and the reason is many of our site’s users are mortgage brokers. Although some of the companies listed use capital partnerships for certain types of loans, all lenders are only allowed to promote their direct private lending programs on our website

Two search categories on the site have exceptions to this rule: Residential Owner-Occupied and Small Business Lenders. Most of the companies you find in these searches are not private lenders.

Browse Lenders

 

The companies listed pay us a monthly advertising fee, so there is no cost to make contact through our website. Please remind each company that you found them on PrivateLenderLink.com.

November 14, 2021