How To Calculate Hard Money Loan Down Payment
If you’re new to private lending, you might not be familiar with how the hard money loan down payment process works. 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 the down payment amount will differ depending on the hard money lender that you choose to go with. Regardless of which hard money lender you settle on, almost all of them will require a down payment of some sort.
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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 experienced real estate investor with a high credit score.
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. Every private money lender works 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 private money 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. For instance, if a real estate investor attempts to fund a house flipping project with a conventional loan, their application will be rejected in most instances. Traditional lenders are unwilling to take on the risks that are automatically attached to fix and flip deals.
On the other hand, hard money financing doesn’t share these limitations. As long as the after-repair value of the investment property is worth more than the initial asking price, you have a good chance of securing a hard money loan, provided you have a reasonable credit score.
Ultimately, to hard money lenders, your financial position is less important than the value of the investment property you take on.
Private 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.
Can you use a hard money loan for down payment?
If your goal is to use a hard money loan to make a down payment on a house, your application is unlikely to be granted. This is because hard money financing is classified as a short-term loan. Put another way, once the loan terms expire (24 months is usually the maximum time period with hard money lending), you are required to pay back the full loan amount.
This is relatively easy for real estate investors that have purchased a house with the express intention of selling it for profit. It isn’t that easy for aspiring homeowners hoping to hold on to the house for the long term.
The only additional point on this topic is that you can potentially use a personal loan to fund the down payment needed for a hard money loan. In a sense, this makes it possible to use other people’s money to fully fund a house flipping project.
Why are hard money loan rates higher than a conventional lender?
Hard money loan rates are higher because there is more risk involved than a conventional loan. Purchasing a home to live-in is a less complex matter than buying a home in order to sell it for profit after making renovations. There are far more variables involved when compared to a traditional mortgage. The higher interest rate effectively compensates for the higher level of risk that a hard money lender is willing to take on.