Why Do Hard Money Lenders Require A Down Payment?

If you’re new to the private lending landscape, it’s likely you have some questions about what exactly 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 actually differs from lender to lender, but we’re going to go over why some do require a down payment.

What is a Hard Money Loan?

A hard money loan is a short-term loan that does not come from traditional lenders, but rather private lenders that accept property or an asset as collateral. Unlike traditional mortgages or other types of secured financing, hard money loans typically have a quicker approval process, which makes them ideal if you need to make the purchase happen quickly.

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. There are a few factors that determine the amount a borrower’s down payment will be: A borrower’s credit score, their prior experience, and the valuation of the property the loan is for.

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. The location of the property and a borrower’s experience may also affect this amount.

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 lenders requiring a down payment, it lowers the risk for them should the loan not be repaid.

It’s important to note that every lender will have their own criteria for their loans, including how much risk they are willing to take on.

When to Consider A Hard Money Loan

Borrowers without the money for a down payment will likely struggle to secure a hard money loan with most lenders, but you could end up with less of a down payment from a private lender than you would with a bank. Private lenders can also help borrowers close quickly, and provide them with more buying power when making offers.

What are Hard Money Loans Used For?

Now that we know why a down payment is required for hard money loans, here are some common reasons borrowers seek out these loans.

Fix & Flip

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 Property

Individuals who want to invest in rental property but don’t qualify for traditional financing might turn to a hard money loan to pay for their investment.

Purchasing Commercial Property

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.

Looking for Funding for Your Next Real Estate Project?

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