When a new prospective borrower states they need 100% financing the lender will instantly be reluctant to provide financing. This simple statement tells a great deal about the borrower and asks too much of the lender.
1. The borrower is likely not financially strong
When a hard money borrower needs 100% financing this immediately calls into question the overall financial strength of the borrower. With little cash to commit to the project will the borrower be able to make payments on the loan? Do they have cash reserves set aside to deal with any unforeseen issues that may arise with the project? The last thing a lender wants to do is loan money out to a borrower who isn’t going to be able to pay it back on time.
2. The borrower is most likely inexperienced in real estate
Borrowers who think they will be able to obtain 100% loan to value (LTV) hard money loans to invest in real estate probably haven’t done many deals if any. With inexperience comes the likelihood that the real estate investor will make mistakes that will cost them money and jeopardize the project. Borrowers with some real estate investing experience will have been exposed to the lending process and figured out that lenders do not provide 100% of the funds to purchase a property.
3. The borrower is asking the lender to assume all of the risk
Hard money loans are asset based. The loan is secured by the real estate (asset) being used as the collateral for the loan. The borrower must have sufficient equity (generally at least 25%) in the property which ensures the borrower is committed to the property / project and protects the lenders from some downside risk if something with the project goes wrong or the overall market takes a downturn. If the borrower has no equity in the property the lender is assuming all of the risk. Lenders need to reduce their risk whenever possible so they can retrieve their investments and continue lending money.
If the borrower owns a property but has no equity in it, any decrease in value creates the potential of a loss for the borrower. If the borrower has no equity in the property to protect, they may choose to abandon the project and property altogether. When a borrower stops making payments and the property is abandoned, the lender is forced to take back the property and salvage as much value as possible. This is a terrible situation for a lender to be in since the lender is no longer receiving loan payments and they are taking back a property worth less than the amount they initially loaned out. If the borrower had equity invested in the property they would have had more financial incentive to make sure the project was completed successfully.
The Dangers of 100% Financing
100% financing (and even some financing above 100%) was largely responsible for the real estate bubble and collapse of 2007. When the real estate market started declining, many homeowners with 100% LTV loans realized they owed more on their mortgage than their property was worth. Many decided to walk away from their properties and be foreclosed upon, which caused the real estate market to collapse even further and drag the overall American economy down with it.
Why do many new borrowers think 100% financing is available?
The biggest hurdle to most new real estate investors getting started is usually lack of funds. Real estate gurus selling their programs via infomercials or at pricey seminars understand this and assure their prospective students they will learn how to invest in real estate without investing any money of their own. While this sounds promising, it usually involves convincing other people with personal retirement accounts to provide the funds for investment or taking out lines of credit with 0% introductory rate credit card offers. These are options that may work for some real estate investors but they can be very risky endeavors that can end in financial ruin.
Hard money lenders want their borrowers to succeed
When hard money lenders provide a loan, they want to be confident that the borrower is able to repay the loan on time. If the borrower isn’t able to pay back the loan, this creates a great deal of extra work, stress and potential financial loss for the lender. A strong borrower with a significant down payment (or equity in the property) and cash reserves has the best chance of obtaining a hard money loan and succeeding with their real estate project.
FAQs
Higher Interest Rates or Fees
Without equity in the home, 100% financing may lead to higher interest rates and fees as lenders may view these loans as higher risk because of the lack of a down payment. However, even with current high interest rates, you could secure a lower interest rate with a government-back loan.
Can you negotiate with hard money lenders? ›
Negotiating favorable terms with hard money lenders requires preparation, clear communication, and a solid understanding of your investment. By following these tips, you can maximize your borrowing potential and establish agreements that support your investment objectives.
What are most hard money lenders primarily qualify a loan amount based on? ›
Hard money loans are secured by the property they're tied to instead of the borrower's credit and financial profile. The loan is typically based on the property's value and comes with a short repayment term, usually less than a year.
Why would you be refused finance? ›
These include: a history of missed payments or possible fraudulent activity on your file. the lender deciding you wouldn't be able to repay. not meeting a lender's specific terms and conditions, such as a minimum income level, or a mistake on your credit report – such as a typo in your address or other detail.
What does it mean to get 100% financing? ›
100% financing refers to a funding arrangement that covers the full cost of an asset or investment without requiring any upfront payment from the borrower. It eliminates the need for a down payment, allowing businesses to acquire the necessary equipment or assets immediately.
What is 100% debt financing? ›
100 percent debt financing means that money is entirely borrowed from creditors to start a business or finance a project. Companies have different sources of funds, and these are often summarized in terms of percentage.
How do you present a deal to a hard money lender? ›
Documentation that should be included is as follows: a copy of the purchase contract (if you're buying a new property) or Broker's Price Opinion or other market analysis (if you're refinancing), an appraisal, the Commitment for Title, a copy of the survey, inspection reports, and contractor repair estimates (if any ...
Is being a hard money lender risky? ›
The biggest risk for hard money lenders is the chance that the borrower's deal might fall through, and they cannot pay back their loan. Hence, hard money lenders use the asset as collateral, to mitigate this risk and get their money back if the borrower defaults on their loan repayments.
Do hard money lenders look at credit? ›
While credit score isn't the primary factor a hard money lender considers, it is still a crucial component of the application process. Usually, a minimum credit score of 550 or higher is required to qualify for a hard money loan.
Can you refinance out of a hard money loan? ›
Fast Turnaround Times For Hard Money Cash-Out Refis
California Hard Money Direct can fully complete a cash-out refinance on a non-owner-occupied property in about 7-9 days. Owner-occupied refinance loans take a bit longer because of the mandatory guidelines all private lenders must follow.
California Hard Money Lending Guidelines
Here are the typical hard money lending guidelines for most lenders in California as of March 2024: The interest rates for hard money loans in California range from 9% to 12%. For a 2nd mortgage in California, most hard money lenders charge 11% to 14%.
What happens if you default on a hard money loan? ›
If you default on the hard money loan at any point, the lender takes the property and sells it, using the funds to pay off the outstanding loan. The lender would only need to sell the home for 40% – 50% of its original sales price to make its money back.
How to get a loan when everyone denies you? ›
Paying down debts, increasing your income, applying with a co-signer or co-borrower and looking for lenders that specialize in loans within your credit band could increase your approval odds.
How to get a loan when no one will approve you? ›
Getting a personal loan with a co-signer that has a strong credit score and a solid income can boost your application. Your co-signer – ideally, a family member or close friend – will apply alongside you, and you'll both be responsible for repayment of the loan.
Why am I not eligible for financing? ›
Grounds for loan application denial based on credit or income could include: Not enough credit history. Missing too many credit payments. A high debt-to-income ratio (how much of your monthly income goes toward debt payments).
Is 0% financing a gimmick? ›
Banks and other lenders cannot offer 0% financing because they would lose money. A manufacturer can do so because they can absorb the costs and still make a profit on the sale of the vehicle. There are unscrupulous dealers who will advertise 0% financing on vehicles that don't actually have the incentive available.
Why 30 year loans are bad? ›
Cons of a 30-Year Fixed Mortgage
Higher interest rate: The longer a lender's risk of being repaid is stretched out (and the longer the lender's money is tied up), the higher the interest rate tends to be; customarily, the difference between 15- and 30-year loans is about a half-point.
Why is financing a bad idea? ›
Buying on credit can also make your purchases more expensive, considering the interest you may pay on them. Getting into too much debt can not only hurt your credit score but also strain relationships with family and friends.
Why is too much equity financing bad? ›
Additionally, by relying too much on equity financing, the business may miss out on the tax benefits and leverage effects of debt financing, which can lower its effective tax rate and increase its return on equity. These factors can affect the profitability and growth potential of the business.
