Why Do Hard Money Lenders Require A Down Payment?

If you’re new to the private lending landscape, you’ve likely encountered questions from your clients about what is needed to secure a loan. Many borrower’s first inquiry is usually about how much of their own money they need to put down when taking out this type of loan. The answer varies depending on the lender, but brokers and originators like you need to understand why down payments are often required—and how this impacts your clients.

What is a Hard Money Loan?

A hard money loan is a short-term loan that does not come from traditional lenders, but rather from private lenders that accept property or an asset as collateral. Unlike traditional mortgages, hard money loans typically have a shorter approval process, which makes them ideal if you need to make the purchase happen quickly. As a third-party originator, understanding the hard money lending process can help you better advise your clients and close deals efficiently.

Hard Money Down Payment Basics

The majority of hard money lenders will require a down payment of some kind. This is normal due to the nature of how these loans are structured. A few key factors influence the down payment amount required by lenders:

• A borrower’s credit score: A client’s credit score and financial history will often determine how much they are asked to contribute upfront, but are not necessarily a factor in loan approval.
• Experience of the borrower: If you've invested before, you might get access to better loan terms than someone borrowing for the first time.
• Property valuation: Several factors such as the location play a significant role in determining property values, and will also affect down payment requirements.

It’s not uncommon for hard money lenders to require anywhere from 10%-30% of the total loan amount for the down payment, but this varies from lender to lender.

Why is a Down Payment Necessary?

Hard money loans are funded by private investors, as opposed to traditional lenders like banks or credit unions, and those investors are taking on more risk by financing this type of loan. Lenders have to assume that their borrowers will be able to pay back these loans, including interest, within the timeframe set by the loan terms. By requiring a down payment, this lowers some of the risk for them should the loan not be repaid.

As a broker or wholesale partner, it's crucial to let your clients know this. Make it clear that hard money loan requirements are there to protect everyone involved. This helps your clients get what they need to know to get their funds.

Additionally, down payments serve as a confidence signal to lenders. When borrowers contribute their capital, it demonstrates a commitment to the success of their project and reduces the lender’s exposure in case of default.

When to Recommend a Hard Money Loan

For brokers and originators, recommending a hard money loan is a valuable option for clients who:

• Need funding quickly to capitalize on time-sensitive opportunities.
• Are unable to qualify for traditional financing due to credit issues or unconventional property types.
• Are pursuing projects with high-profit potential, such as fix-and-flip investments or value-add real estate opportunities.

Clients struggling to meet down payment requirements may find some flexibility with private lenders, when compared to stricter underwriting criteria with traditional lenders.

What Are Hard Money Loans Used For?

Brokers frequently assist clients with hard money loans for a variety of purposes. Some of the most common use cases include:

Fix & Flip Projects

Hard money loans are commonly used for flipping a house, as these projects happen fairly quickly, and professional flippers prefer faster forms of financing. Because most fix and flip projects are completed in less than a year, there’s no need for a lengthy loan term like you’d have with a traditional mortgage.

Purchasing Investment Properties

Clients looking to acquire rental properties but unable to meet conventional financing requirements often turn to hard money lenders for their quick decision-making and customized terms.

Purchasing Commercial Real Estate

Similarly, a business owner may look to use a hard money loan to fund the purchase of commercial real estate if they are unable to secure traditional financing. Hard money loans can be useful for entrepreneurs looking to purchase unique property that doesn’t qualify for conventional financing.

As a broker, having a strong understanding of these scenarios allows you to position hard money loans as the ideal solution for clients seeking creative financing options.

Bridging the Gap Between Clients and Lenders

For brokers, the key to building trust with both clients and lenders is transparency. When you're showing your clients the ropes of hard money lending, educating them about how it works is crucial. Don't forget to discuss how much cash they'll need for the hard money loan down payment. This move does a couple things: it keeps everyone on the same page and also makes you look good to lenders, because you've got clients who know their stuff when filling out paperwork.

Additionally, consider partnering with lenders who offer flexible terms and competitive rates to enhance your value as an originator. Be sure to work with top-notch hard money lenders, and you're on your way to secure more deals and build lasting partnerships.

How Brokers Can Leverage Hard Money Lending to Grow Their Business

By specializing in hard money loans, you can expand your offerings and attract a wider range of clients. Here’s how you can use this niche to your advantage:

1. Expand Your Client Base: Suggest loan options to borrowers who don't fit standard lending guidelines, like those carrying lower credit scores or taking on nontraditional projects.
2. Close Deals Faster: Hard money lending comes with speedier approval processes allowing you to offer prompt solutions, and setting you up as the go-to person for clients looking for quick cash.
3. Earn Higher Referral Fees: Most hard money lenders will include attractive referral commissions thanking you for connecting them with eligible borrowers.

Looking for Funding for Your Next Real Estate Project?

As a third-party originator, your success depends on aligning with lenders who've got a full set of loan options and a smooth hard money lending process. Partnering with private lenders that specialize in real estate investments allow you to offer tailored solutions for your clients.

RCN Capital offers short-term and long-term financing options for real estate investors. Whether your clients are looking to fix and flip properties or hold properties for rental income, RCN has flexible options that are suited to their needs. Contact us today to learn more about our loan options.