Hard money lenders definition


Find out the different types of lenders and how they interact to fund hard money loans. This blog sheds light on the web of brokers and lenders cooperating to fund a private hard money loan and their relationship.

Lender definition from a Borrower point of view

Borrowers usually do not distinguish between "Brokers," "Lenders," "Investors," "Direct Lenders, or "Referral Lender"." Borrowers' goal is getting their loans approved and funded; the term "Lender" could mean anyone who facilitates that goal.

Lender definition from a broker's point of view

Brokers define a lender as the entity that approves and funds the loan, i.e., a Direct Lender.

Direct Lender ( Funding Lender

A direct Lender is the entity that approves and funds the loan. Direct Lenders don't always use their own money, but they have the ability to draw loan documents and fund loans from their controlled pool fund or Private Investors. Direct Lenders get the loan package directly from the Borrower or via an Originating Broker or Referral Broker. Sophisticated borrowers and brokers who shop for loans on behalf of their borrowers' clients always ask, "Are you a direct lender? " There are lots of benefits to Brokers shopping for loans to get a Direct Lender. Borrowers can sometimes fair better with an experienced loan broker who will eventually produce a better loan for the Borrower by shopping and negotiating the loan with multiple Direct lenders.

Loan Package

Loan Packages should minimally include a basic loan application, credit report property profile, and information on the borrower loan purpose and exit strategy. A complete loan package will have bank statements, leases, and documented income information, like tax returns, explanations of credit derogatories, preliminary title reports, and, if possible, appraisal or BPO. Since many Direct Lenders require that they order the appraisal themselves, loan packages are often presented to Direct Lenders without an appraisal report.

Mortgage Brokers

Are licensed individuals or companies who solicit loans, process loan packages, and shop them to Direct Lenders. Experienced Mortgage Brokers establish relationships with Direct lenders and know where to and how to present the loan package most favorably. Mortgage Brokers could simultaneously deliver the package to several direct lenders and negotiate the best rate and terms on behalf of the borrowers. Brokers can also act as Direct lenders.

Brokers who are also Direct Lenders

Some Brokers can act as Direct Lenders for certain types of loans while being Brokers for other kinds of loans. It could happen that a lender, acting as a Direct lender, starts underwriting a loan with the intention of using his own private investors and then transfers the loan package to another Direct Lender who actually funds the loan.

Brokers Chains

A Broker-Chain comprises an Originating Broker, at least one Referral Broker, and a Direct lender. Broker- Chains are not necessarily bad and sometimes are the only method by which the loan can close; however, the entities who are part of the chain should know their exact position and exact compensation for their relative work/ connection.


In the graphic, the total commission of 3.5% is split among the originating broker, the two referral brokers, and the direct lender. The commission split is different from loan to loan. It depend only on the agreement among the broker/ lenders on the chain.   

Originating Broker

The Originating Broker is the broker who was first in contact with the Borrower. The originating broker creates a loan package and sends it to the direct Lender or to a referral broker/lender. Originating Brokers always try to reach direct lenders and avoid referral brokers. The reason behind it is to maximize their commission and have better control of the transaction. An apparent Direct Lender often who can't fund the loan could give up or sometimes become a referral lender; thus, a Broker Chain is created.

Referral Brokers (Referral Lenders)

Any broker or Lender part of the brokers' chain becomes a Referral Broker. Referral Brokers can do a lot of underwriting work, gathering documents and applications before presenting them to another lender or several lenders. In some cases, the Referral brokers do not underwrite but only transfer a package already prepared by another broker or the basic information submitted by the Borrower. The Originating Broker is also always a Referral Broker.

Brokers Pretending to be Direct Lenders

Some Brokers mislead themselves as Direct Lenders to attract business; this could create confusion and waste time as it creates a unanimous broker chain.

Private Investors

Private investors are individuals who are using their money to invest in loans. Private Investors are not directly connected to the borrowers because of the licensing requirements, and they fund the loans via Direct Lenders who underwrite the loans and arrange all the legal disclosures needed. Some Private Investors with Broker/ Lender licenses could fund the Borrower, but this is rare.

Wholesale Lenders

Wholesale Lenders are direct lenders who fund loans only through loan brokers. Wholesale lenders do not interact directly with the borrowers. Many wholesale lenders have a parallel Retail division that accepts loan applications directly from borrowers.

Retail Lenders

Retail lenders are Direct Lenders accepting loan applications directly from borrowers and bypassing all broker interventions. Some Retail lenders also have a wholesale division accepting loans via brokers.

What is better for the Borrower, retail, or wholesale Lender ( via a broker)?

It all depends on the loan complexity. With a simple loan request going directly to a retail lender, the Borrower gets a direct interaction with the money source, fast approval, and maybe saves a little on the loan fees. With a complex loan, a good Loan Broker can better present the loan request to the Lender via the wholesale division. A Broker will also try several lenders instead of one to get the best possible rate and terms.

Referral Brokers (Referral Lenders)

Any broker or Lender part of the brokers' chain becomes a Referral Broker. Referral Brokers can do much underwriting work, gathering documents and applications that the Orinating Broker has not already collected. Once the package is completed, they will forward it to one or more Direct Lenders. In some cases, the referral brokers do not underwrite but only transfer a package already prepared by another broker or the basic information submitted by the Borrower.

Mixed Lender definitions

Depending on their role in a loan transaction, brokers and lenders could have several designations applied to them.

For example, a Broker can be a Direct Lender, a Retail Lender, a Wholesale Lender, or a Referral broker.

Loan Lending Cycle

A Lending Cycle

depends on the type of loan origination

Simple Borrower to Direct Lender

Borrower to Mortgage Broker

Borrower to Mortgage Broker with Referral Broker