One of the first questions that real estate investors who have just started using hard money ask themselves has to do with down payment. Will the hard money lenders always ask them for a down payment? If that is true, what makes hard money loans so different from the other options of financing?
What are hard money loans?
Turns out, hard money does not always require a down payment. But before we proceed to explain what that means for you, let us describe what a hard money loan is. A loan that is borrowed from a lender against a physical asset. Interestingly, that asset is the property that the borrower will be buying.
Unlike traditional forms of lending, hard money loans don’t usually depend on the borrower’s credit score. But like other loans, the lender gets monthly interest until the loan can be paid back. The borrower, on the other hand, receives the money. At times, the borrower may have to pay an up-front fee. But that is just a one-time thing before the lender can process the loan.
How much down payment do you have to pay to get one?
If you are a real estate investor who wants to get a hard money loan, you can get one from either an individual investor or a group. When you don’t reach out to a reputable hard money lender, you will find to your surprise that many will ask you for a down payment. The amount you’d have to pay will vary from borrower to borrower. Mostly though, the lender will look at factors like your credit score and experience to calculate the down payment. You can safely assume that it is going to be 20%-30% of the amount you will borrow.
It is understandable why lenders do that. They are taking a risk, and when they have received 20-30% of the money they lend to you, the risk becomes lower. Even so, getting the rest of their money back would depend on you pulling off the flip – or sale – to pay them back in a timely manner. Besides that, you will also be paying back the loan with interest.
Just keep in mind that there is no common contract when it comes to hard money lending. The underwriting criteria for each company will be different. That means you may have to pay a different amount for each deal. The better credit score you have, the less money you will pay upfront. Having some experience in the field of real estate investment is also a plus in this matter.
But if you want a lender that doesn’t ask for payment upfront, then consider Houston Hard Money Loans.
Types of hard money loans
There isn’t just a single type of hard money loan. Here are some of them:
A hard money loan called Mortgage Refinancing can be used to pay off single or multiple loans over a property. That’s because they will combine to become a new loan. This time though, the principal balance would be bigger. Homeowners can avail this type of loan and pay the rest out of pocket. Alternatively, they can roll the new loan costs into the principal balance directly.
Another type of hard money loan, the Equity Loan, is great when funding is needed quickly. If there is an existing first mortgage, the equity loan will come after it. When choosing this option, make sure that you check that it is available in your state.
The Bridge Loan is also a hard money loan. It is perfect for when investors want to buy a new home but haven’t sold their existing one. It can fill in for the cash that will only become available after the sale. Seller’s markets use bridge loans more commonly than buyer’s markets do.
The equity loan – a hard money loan that doesn’t require a down payment
Equity is another word used in the real estate market for collateral, property, or money. A loan based on equity has an advantage over others since it doesn’t require a down payment. For instance, a property that is both clear and worth $80,000 is equivalent to $80,000 in equity. That means you can get a hard money lender to give you that much in cash without a down payment. Since you have positive equity – the property is cleared for selling – the lender wouldn’t be taking as big a risk by lending you money. The equity along with the property that you want to buy will both be considered collateral. That means you can get the money you need!
Looking for a lender for a hard money equity loan? Check out BiggerPocket’s Hard Money Lender Directory for reputable ones. We hope with this article, you’ll have the knowledge and the confidence you need to invest with hard money loans. Don’t be discouraged by the usual than higher interest rates. Instead, think about the speed with which you will have funds available to you. It is a good tradeoff!