Do All Hard Money Lenders Require A Down Payment?

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Hard money lenders are usually non-bank lenders that extend short term loans to the general population for a higher interest rate than what one may receive at a bank. These are loans targeted at those investing in the real estate market – Knoxville hard money loan is an example of a real-estate-focused hard money lending project initiated by Longhorn Investments. The majority of hard money lenders in the market require a down payment ranging between 20% to 30% in order for the lender to justify the loan and make sure the credited entity is capable of paying the loan back, and others may require collateral to be put up before the loan can be secured. Financing for real estate purchases through hard money loans are generally not 100% financed according to DoHardMoney.com. Hard money loans are sometimes the best way to secure financing for a real estate investment owing to the time constraint and the return on the investment received after selling the property.

The Knoxville hard money loan program marketed by Longhorn investments of Dallas, Texas, is a great example of the type of criteria required to be fulfilled in hard money lending for real estate investing. The interest payments for a 6-month term loan with an optional 3-month extension range between 12% to 15% with the requirement of an insurance policy on all loans and a mortgagee’s title policy. Property criteria as listed on the website include the following:

  • First Liens Only
  • Single-family, 2-4 unit, townhomes (no condominiums or manufactured homes).
  • Loans made based on the After-Repair Value (APR)
  • Appraisals must be ordered by Longhorn and performed by a third-party appraiser.
  • Properties should be located in or around suburban and/or major metropolitan areas as specified on the website
  • Longhorn reserves the right to adjust advance rate requirements as deemed necessary.

In addition to these criteria listed for the property, the borrower must have a credit score of at least 650 with no recent Bankruptcy or Foreclosures (subject to review by Longhorn) and a minimum of $15,000 in a checking, savings, IRA, and/or 401(k) account. Also, “the borrower MUST provide a minimum 6-month insurance policy to be paid in full at closing. The borrower’s insurance agent should provide a certificate of insurance or evidence of insurance, including invoice, to our processing department prior to closing.” As elucidated comprehensively by this example from Longhorn Investments, hard money lenders for real estate investments have certain criteria one needs to fulfill, both as the borrower and on the property the borrower is borrowing on, to secure a short-term hard money loan.

Hard money lenders are a more effective solution when compared with banks for real estate investors. Since hard money lenders work for real estate investors, they usually have short-term loans ranging from 1 to 3 years with higher than normal interest rates because they work quite well for investors when compared with banks and major lending institutions. Banks generally want to generate guaranteed revenue from the loans made out to borrowers, so low-interest rates coupled with large term durations, namely 15 to 30 years, are common for banks. In addition, banks may penalize you for paying off your loan earlier than the loan term duration, whereas hard money lenders apply no penalties to their borrowers. Moreover, according to Gauntlet Lending, “[…] some hard money lenders want a down payment in addition to collateral. But if a hard money lender knows you and you’ve done great in the past, they may accept only the collateral.”