Do Hard Money Lenders Require Down Payments?
Hard money loans have become a popular financing option for many investors.
But one question that often arises is:
Do hard lenders require a down payment for a private loan?
Let’s delve into the details below, or watch our overview video:
Understanding Loan-To-Value (LTV) and Loan-To-Cost (LTC)
Hard money lenders usually require down payments.
While they might advertise up to 70% LTV and the possibility of 100% financing, there’s more to the story. Many lenders also have LTC parameters. For instance:
- If a lender has an LTC requirement of 80%, then the down payment would be 20%.
- If the LTC requirement is 85%, the down payment would be 15%.
- The down payment could increase if the purchase price and construction budget surpass 70% LTV.
Why Some Lenders Can’t Offer 100% Financing
Many lenders rely on credit facilities or sell their loans to note buyers.
The terms of these credit facilities or the requirements of the note buyers often mandate a minimum LTC.
As a result:
- Lenders might not be able to provide 100% financing because their funding source or loan buyer prohibits it.
- Lenders with registered funds might also avoid 100% financing due to fund restrictions.
- Even lenders using their own capital often avoid 100% financing due to the heightened risk of borrower default.
Exceptions to the Rule
While most lenders avoid 100% financing, there are exceptions.
For instance, DFW Hard Money has occasionally offered 100% financing for specific borrowers and properties with exceptionally low LTV.
However, such offers are not the norm.
The Bottom Line
In conclusion, hard money lenders typically require down payments.
This practice reduces the risk of default and, in the event of a default, minimizes potential losses on the loan.
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