Warehouse Funding Costs Explained: Rates, Fees and All-In Cost
What a warehouse line really costs a private lender, from index plus spread to fees, audits, custody and the equity haircut, with a worked all-in cost per loan.
Warehouse funding costs more than the interest rate on the term sheet. A warehouse line of credit is usually priced at an index, such as SOFR, plus a spread, and on top of that come upfront and unused-line fees, legal and diligence costs, field exams, custody, the equity "haircut" you still fund yourself, and the cash that covenants require you to hold. The useful number is the all-in cost per loan, and this guide shows how to model it.
If you're still deciding whether a line is right for you, our warehouse line of credit alternative page sets out the options side by side.
Key takeaways
- Warehouse pricing is generally an index plus a spread. Spreads vary by lender, by borrower and by collateral, so the only reliable figure is the one in your own term sheet.
- Fixed costs and unused-line fees are spread across the loans you actually fund, so low utilization makes every loan more expensive.
- The advance rate is below 100%, so part of every loan is your own equity, and that equity has a cost.
- Covenants on net worth, cash and leverage tie up capital that could otherwise be lent.
- Compare the all-in cost with direct capital placement, where you pay a placement fee from the points only when a loan funds, carry nothing, and still earn a yield spread above the capital partner's agreed rate.
How is a warehouse line of credit priced?
A warehouse line is usually priced as a floating rate: a benchmark index plus a spread set by the lender. For a refresher on how lines work, see what warehouse lending is and our guide to the warehouse line of credit for private lenders.
The index. Many floating-rate facilities today reference the Secured Overnight Financing Rate. The New York Fed describes SOFR as a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities, and publishes it each business day. Some lines use another index, sometimes with a floor.
The spread. The margin over the index depends on the lender, your balance sheet, your track record, the loan types on the line and how much you draw. There is no single market spread for business-purpose lenders. The OCC's Asset-Based Lending handbook describes collateral-based lines as often priced with a complex structure of fees and spreads that can change with performance, such as how much of the line is available and the borrower's leverage.
Context from research. Federal Reserve staff research on warehouse lines extended to nonbank mortgage companies, using supervisory data from 2013 to 2016, found that most lines in the sample were tied to a floating benchmark (LIBOR at the time), most matured in about a year or less, and about 40% were guaranteed, typically by major shareholders for private companies (Kim, Laufer, Pence, Stanton and Wallace, FEDS 2018-016). That study covers residential originators, not business-purpose lenders, but the point carries over: short terms mean pricing is renegotiated often.
What fees come with a warehouse line?
Beyond interest, expect some of these. Names and amounts vary by lender.
- Upfront or commitment fee. Charged at closing or renewal, usually on the committed amount, not the amount you use.
- Non-usage (unused line) fee. Charged on the part of the commitment you don't draw.
- Minimum utilization. Some lines charge interest as if a minimum balance were outstanding, whether or not you have loans to put on it.
- Legal and diligence costs. You typically pay your own counsel and often the lender's.
- Audit and field exam fees. Lenders periodically review your files, servicing and collateral, and the borrower often pays for these reviews. The OCC's Asset-Based Lending handbook, which covers collateral-based lines generally, notes that the fee structure typically includes charges to the borrower for administrative costs such as field audits and appraisals.
- Custodial or bailee costs. Original notes held by a custodian or under a bailee letter can carry setup and per-loan fees.
What does the equity haircut really cost?
The haircut is the share of each loan the line won't fund, and you have to fund it from your own capital. The advance rate depends on the lender and the collateral; the Federal Reserve paper above notes that for residential originations, warehouse lenders typically funded around 95% of the balance, so the originator had skin in the game. Business-purpose lines can be set differently, so use the advance rate in your own term sheet.
That equity could otherwise be lent or kept as a cushion. A simple way to price it is to apply your own target return on capital to it for as long as the loan sits on the line.
Why do covenants have a cost?
Covenants limit what you can do with your capital, and that has an opportunity cost. The same Federal Reserve research describes common warehouse covenants: minimum net worth, minimum unrestricted cash, maximum liabilities-to-net-worth ratios and profitability tests, and notes that lenders can adjust terms or cancel lines when covenants are broken. Many lines also cap how long a loan can stay on the line (a dwell or aging limit).
Cash held to meet a liquidity covenant isn't working as loan capital, and guarantees put personal or corporate assets behind the line.
How do you model the all-in cost per loan?
Use your own quotes.
- Estimate a year of fixed costs: upfront fee, legal and diligence (spread over the line's term), audits and field exams, and any custodial setup.
- Estimate the unused-line fee from your expected average utilization, and any minimum-utilization charge.
- Divide fixed costs by the number of loans you expect to put on the line that year.
- Add per-loan variable costs: interest on the advance for the expected time on the line, plus per-loan custodial and wire fees.
- Add the cost of your equity: the haircut times your target return times the time on the line.
- Express it as an annualized rate on the advance and compare it with the headline rate.
A hypothetical worked example
Every number below is hypothetical, chosen only to show the method. None is a quote, a market rate or a Lender Capital term.
A lender has a hypothetical $5 million line with a 75% advance rate and an assumed all-in floating rate (index plus spread) of 8.5%. It expects to fund 15 loans a year on the line at 60% average utilization. One loan: $400,000, 12-month bridge loan at 11% with 2 points, on the line for 9 months before it pays off.
| Item | Hypothetical assumption | Cost for this loan |
|---|---|---|
| Advance from the line | 75% of $400,000 | $300,000 |
| Equity haircut you fund | 25% of $400,000 | $100,000 |
| Interest on the advance | $300,000 × 8.5% × 9/12 | $19,125 |
| Commitment fee | 0.50% of $5M = $25,000 a year, ÷ 15 loans | $1,667 |
| Legal and diligence | $30,000 a year, ÷ 15 loans | $2,000 |
| Audits and field exams | $10,000 a year, ÷ 15 loans | $667 |
| Unused-line fee | 0.25% on $2M unused = $5,000 a year, ÷ 15 loans | $333 |
| Custodial and wires | Per-loan fees | $250 |
| Cash funding cost | $24,042 | |
| Cost of your equity | $100,000 × 12% target × 9/12 | $9,000 |
| All-in cost, including equity | $33,042 |
The cash funding cost of $24,042 on a $300,000 advance for nine months works out to about 10.7% a year, well above the 8.5% headline rate. Halve the number of loans and the fixed-cost share doubles.
Against that, the loan earns $33,000 of interest over nine months ($400,000 × 11% × 9/12) plus $8,000 in points. After the cash funding cost the lender keeps about $16,958 on its $100,000 of equity, before servicing costs and any credit losses, which stay with the lender.
How does direct capital placement compare?
With direct capital placement, a capital partner funds the whole loan at closing and the loan is assigned to it at closing. You pay a placement fee from your origination points only when the loan funds, and there's no line, no haircut, no unused-line fee and no covenant package. You still earn on the loan's interest: you set the note rate, the capital partner receives its agreed rate, and you keep the difference as a yield spread. The partner earns most of the interest, so your spread depends on pricing with enough margin above its rate. See how a whole loan sale works.
In the same example, take Lender Capital's standard placement fee from its published fee schedule: 1.00% of the loan amount up to $3,000,000 (0.75% for preferred lenders), with a $2,500 minimum, paid at closing from the origination points. On a $400,000 loan the fee is $4,000, so the lender keeps $4,000 of its $8,000 in points. If it also prices the note a hypothetical 1.5% above the capital partner's agreed rate, it earns that spread on the $400,000 balance, about $6,000 a year, while tying up no equity in a loan the capital partner owns.
| Warehouse line | Direct capital placement | |
|---|---|---|
| How you pay | Interest plus fees, whether or not you fund loans | Placement fee from points, only when a loan funds |
| Fixed costs | Upfront, legal, audits, unused-line fees | None for a line |
| Your equity per loan | The haircut | None |
| Ongoing interest income | You keep all interest above the line's cost | The partner earns its agreed rate; you keep the spread above it |
| Credit risk | Yours | The capital partner's |
| Covenants and guarantees | Usually | No line covenants |
When a warehouse line is the better fit: you have steady volume to keep the line used, the equity to fund haircuts, and the balance sheet to meet covenants, and you want to keep the loans and their yield. On those facts the line can be the cheaper way to grow.
When placement fits better: your volume is uneven, your equity is limited, you can't qualify for a warehouse line yet, or you'd rather not carry the credit risk. Many lenders use both. Our comparison of warehouse lines, whole loan sales and participations and our guide to how private lenders fund more loans cover the trade-offs.
Related: how to avoid warehouse covenants, margin calls and non-usage fees and table funding costs and lender economics.
Frequently asked questions
What is the interest rate on a warehouse line of credit?
It is usually a floating rate: an index such as SOFR plus a spread set by the lender. Spreads vary by lender, borrower and collateral, so compare written quotes on an all-in basis.
What fees do warehouse lenders charge?
Common items include an upfront or commitment fee, a non-usage fee, minimum utilization charges, legal and diligence costs, field exam fees and custodial fees. Amounts vary by lender.
How do I calculate the all-in cost of a warehouse line?
Add a year of fixed costs and unused-line fees, divide by the number of loans you expect to fund, then add each loan's interest, per-loan fees and the cost of the equity haircut. Divide by the advance and annualize to compare with the headline rate.
Is a warehouse line cheaper than selling loans?
It depends on volume, equity and risk appetite. A well-used line can be cheaper per dollar if you want to keep all of the interest, while placement costs part of your points but uses no capital, leaves the loan with the capital partner that owns it and still lets you earn a spread above the partner's rate.
How Lender Capital fits
Lender Capital offers direct capital placement for first-lien, business-purpose real estate loans: bridge, fix and flip, ground-up construction and DSCR rental. You submit the loan with a complete file, one capital partner reviews the full file and funds the whole loan at closing, and the loan is assigned to it at closing. You keep servicing and the borrower relationship, and you pay a placement fee from your origination points only when the loan funds. Lenders are reviewed for track record, underwriting and licensing before submitting. You keep your points and earn a yield spread: you set the borrower's note rate, the capital partner receives its agreed rate, and the difference is yours.
If you're weighing a line against the alternatives, start with our warehouse line of credit alternative page, read how it works for lenders, or apply as a lender.
Sources
- Federal Reserve Bank of New York, Secured Overnight Financing Rate (SOFR)
- Office of the Comptroller of the Currency, Comptroller's Handbook, Asset-Based Lending
- Kim, Laufer, Pence, Stanton and Wallace, Liquidity Crises in the Mortgage Market, Finance and Economics Discussion Series 2018-016, Board of Governors of the Federal Reserve System
Have a loan you can’t fund?
Lender Capital places whole, first-lien loans with capital partners who fund the entire loan. You pay only when it funds.
