Is Hard Money the Same as No Money Down?

If you are a real estate investor, then hard money loans could be an attractive way to secure hot deals in the market. Not only are these loans processed quickly, typically within a week or two, but they are also flexible. That means you can negotiate the interest rates, repayment terms, and the maximum offer or principle.

Even so, hard money loans come with some requirements that borrowers must meet to qualify for any loan amount. These include having the required (25%-50%) down payment, real estate experience, cash reserves, and financial stability.

For many, all these requirements are reasonable, but for some, raising up to 50% in down payment could be a tall order. So they scout the market for no-money-down hard money loans.

We’ve highlighted the major differences between these two loans and the implications that come with picking either of the two loan products.

Hard Money Loans vs. No-Money-Down Hard Money Loans

Private money loans are designed for real estate investors who want to purchase a property but cannot raise the full amount towards the deal. So they will enlist the financial aid of private money lenders who will offer 50% to 75% of the total cost at an interest rate of 7% to 12%.

Most private lenders will raise the rates if the perceived risk is high; for instance, you are a new customer, and the deal isn’t very impressive.

As a borrower, you’ll get a maximum of 75% financing if you meet all the other requirements set by the lender. The property you want to purchase will also be used as collateral for the loan.

That way, the lender can hedge their risks, i.e., if you fail to repay, they will simply sell the property to recover the full loan amount.

With ordinary hard money loans, you must pay the down payment and use only the property you purchase as collateral. However, you get 100% financing for the deal with no-money-down hard money loans, meaning there’s no down payment.

This loan option does come with some additional requirements designed to minimize the lenders’ risks. We’ve discussed them below.

No-Money-Down Hard Money Loan Requirements

To qualify for a 100% financing of your real estate deal, you must meet either of these fundamental requirements:

• Cross-collateralize the loan. This means you should use more than one property as security for the loan. Ideally, you’ll use the property you want to buy and an additional property such that there is enough equity to act as security. If the rental property you want to buy is worth $400,000, you may be required to use another property worth the same amount to cross-collateralize. That means you’ll be using a total of $800,000 as security for a $400,000 loan, hence a 50% LTV. Some lenders will allow you to use more than two properties as collateral, provided those properties are free and clear.
• The cost of the home should be less than 70-75% of the after-repair value (ARV). This means you need to spot a good deal, preferably an undervalued property in a preferably good neighborhood. To understand this better, we’ll use an example:

Imagine a property is valued at $500,000 after repairs (ARV). This number is estimated by referencing five to ten comparable properties (within the area) sold in the last 90 days. With this option, most lenders will calculate the maximum offer price using the below formula:

Maximum loan amount = (70-75% of the ARV – Repair costs).

For a property with an ARV of $500,000 after a $10,000 renovation, the maximum loan offer would be (75% * $500,000 – $10,000) = $365,000. If you are to get 100% financing, the cost of the property must either be worth $365,000 or less.

Assuming the cost of the property is above this value, the borrower pays the balance. The investor is also responsible for the cost of repairs.

Which One Should You Choose?

The right loan product for your real estate investment will largely depend on your unique financial situation, the available deals in the market, and your personal investment strategy.

If you don’t have enough money to raise the 25% to 50% down payment but have other properties under your name, you can use one of them to cross-collateralize.

Similarly, if you can find a great deal that costs less than 75% of the ARV, you could be eligible for 100% or near 100% financing.

That said, not all private lenders offer this loan option, and even those that do are very selective as to which type of investors can qualify. In other words, the deal should be exceptionally good, and the overall housing market should be great to minimize risks on either side.

All the hard money loans come with some risks, so you should always weigh your options before getting involved. These loans are also meant for investment purposes only due to the short repayment terms and high-interest rates.

Understanding your needs and the overall market before choosing a private money lender will help you minimize most risks.

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