If you’re new to private lending, you might not be familiar with what exactly is needed to secure a loan. A common question that many borrowers have is how much of their own money they need to put down when taking out a loan of this nature. The answer is that it will differ from lender to lender, and we’ll be explaining why some money down from borrowers is needed in this article.
Do Hard Money Lenders Require Down Payment?
In most cases, yes. It is common for hard money lenders to require between 10 and 25 percent of the purchase price. If you have a high credit score and lots of experience, you can potentially put less money down. Conversely, if you have a low credit score and very little experience, you may need to put more money down than a more qualified investor.
Hard Money Down Payment Basics
The majority of hard money lenders you come across will require a down payment of some kind, and this is normal due to the way the loans are structured. The amount of the down payment needed will be calculated based on the borrower’s credit score, their prior experience and the valuation of the property the loan is for. It’s not uncommon for some lenders to require as much as 30% of the total loan amount in down payment from borrowers depending on where the property is located, or on the borrower’s knowledge of the rehab process.
However, depending on the borrower and the deal, other lenders will fund up to 100% of the purchase price if the potential is there. New Silver provides between 80 to 90% loan to purchase to borrowers depending on which loan program they select.
Why Is A Down Payment Necessary?
Private money loans are funded by a group of private investors, and those investors take on more risk by financing this type of loan. These lenders work on the assumption that you will be able to pay back your loan, including the interest, within the timeframe set by the agreed-upon loan terms – if you do not, they are the ones that stand to lose. By having the borrower put some money down, it lowers the risk for the lenders should the loan not be repaid and give them some protection.
Every lender will have their own criteria for underwriting loans, and that will include how much risk they are willing to accept. This is why borrowers without the money for a down payment will struggle to secure a hard money loan with most lenders. Bear in mind that lenders are in the business of lending, and will avoid foreclosing on a property unless they have no other option. It’s better for the lender if your project succeeds.
Why You Should Consider A Hard Money Loan
Hard money lenders still offer a lot of benefits to borrowers even if you do need your own finances, and you will likely use less of your own money on down payment with a private money loan than you would with a bank. These lenders can also help borrowers close quickly, and give them more buying power when they are making their offers.
Because hard money lenders are not as restricted as banks are by regulatory bodies, they can be more flexible on the terms they are willing to agree to. Ultimately, to hard money lenders, your financial position is less important than the value of the property you take on.
Different lenders will have very different approaches to loan underwriting, which is why some will require money down from the borrower and others won’t. The size of the down payment needed by these lenders will depend entirely on the borrower’s prior real estate experience, credit score and property value.
While New Silver does require some money down from borrowers, we aim to keep the cost to the investor as low as possible. New Silver additionally provides instant proof of funds and 100% online applications that can be completed in 10 minutes.