Is a Down payments Compulsory in Hard Money Loans

Do all hard money lenders require a down payment?

The answer is ‘NO’ but you must delve deeper to understand it, and the difference between a down payment and money needed to fill a value gap.

Some hard money lenders who require a down payment will base their decision on your credit score. Different hard money lenders assess risk differently. As risk takers, hard money lenders can only risk their money to you if they see a clear indication that you are likely to return their money.

When asking for a down payment, lenders lower their risk. They also put you in a position where you show your commitment to the project by taking a risk, creating a win-win situation for both parties. As a lender, you put more effort into making the property a success, meaning you get a profit from reselling the property and the lender can earn interest on the loan.

In direct lending, some hard money lenders do not require a down payment. However, borrowers always end up in a situation where they have a money gap because the after repair values do not match with the lender’s values. Often, borrowers confuse this money for a down payment.

For example, if you identify a property you can renovate and sell at $200,000 after doing repairs worth $25,000, and you offer the owner $130,000, you must find the money for both the offer and the repairs.

In such a case, you apply for a loan and your lenders send evaluators to determine the worth of the property. Once your lenders’ underwriter gets the valuation report, they determine that the true value of the property after repairs is $190,000, which means you missed the mark by 10 percent.

The lenders will give you 70 percent of the ARV provided by their underwriters for the property and renovations (70% of $190,000 = $133,000), of which you need to invest $25,000 in renovation, which means you only have $108,000 ($133,000-$25,000) to purchase the property. This creates a money gap you must fill. Clearly, this is a difference in valuation, which is quite different from a down payment.

In such situations, you can access money to cover the gap through a 2nd position lien on the investment from gap financiers.

In other scenarios, some hard money lenders base their calculations on the purchase price unlike the situation above where they used the after repairs value. In cases where the lenders use the purchase price, they only give you a percentage of your offer price up to 80 percent, which means you must make a down payment.

Investing in real estate without capital is quite possible; however, you must understand the market and all the resources available to help you make this happen.