Down payments of between 10-30% are usually required when purchasing a property financed with a hard money loan. The percentage is a wide range that depends on a number of factors and how you structure the deal.
NOTE: If you’re shopping around for hard money lenders we suggest checking out our hard money lenders by state directory.
Factors That Determine Hard Money Loan Down Payment Amount
Factor #1: Deal Economics
The economics of your real estate deal are a primary factor in how much a hard money lender will demand you put down in cash.
Payback time or maturity of the loan is important. If the property can be bought, cleaned up, and quickly flipped, then the lender will tend to require less money down.
On the other hand, if the property requires a lot of renovation and construction work that will take time, then this increases the risk of default from project failure or permitting issues.
How much you buy the property for is also critical. If you’re buying the property at a significant discount — for example in a wholesale property deal — then this reduces the risk to the lender who may be willing to finance a greater percentage of the deal (less down payment).
As a borrower, your job is to prove that your real estate deal has high profit potential and low time-to-money if possible. Otherwise you will need to put up more down payment cash (lowering the LTV or ARV) to get the deal done.
Factor #2: State of the Local Real Estate Market
Hard money lenders want to earn high interest on their capital. But they also look closely at the ability to repossess and liquidate the property quickly if you default on the loan.
Local real estate market liquidity is essential to converting real estate back into cash to pay off your loan in case of a default. This means a healthy real estate market with lots of transactions, rising property values and plenty of comps.
If the property you’re financing is in a risky area then you can expect a higher down payment requirement. This tends to happen in low income areas where potential buyers may not have adequate ability to buy homes. It can also happen in expensive property markets with very high values ($1 million plus) where there are few eligible buyers.
Traditional single family suburban areas with decent schools, healthy job market and low crime rates are preferred for investors looking to put up less down payment. Outside of these areas hard money lenders require more up-front capital to offset their risk.
Factor #3: Liquid Collateral
The property you purchase with hard money loan financing is the primary collateral from the lender’s perspective. The quicker that property can be sold, and the lower discount the lender would have to take on liquidation, the higher the value of that collateral.
But real estate is not the only collateral a hard money lender will consider. For example, you can pledge liquid securities like municipal bonds, T-bills, or even high quality stocks. These can be liquidated quickly at minimal-to-no discount to pay off the loan in case you default.
Other examples of collateral a hard money lender might consider include:
- Another piece of cash-producing real estate, such as a rental house, apartment building or storage facility.
- Vehicles with no outstanding loans
- Machinery and construction equipment owned free and clear
- Inventory such as lumber, bricks, fuel or hard goods
Hard money lenders are experienced with creative financing structures. As long as you can prove the collateral you’re willing to put up is not burdened with a loan and can be sold quickly for cash, then most hard money lenders will consider it.
Keep in mind that putting up more collateral to reduce the amount of cash down payment means that collateral is at risk if you default. The lender will foreclose and liquidate it if you default on the loan.
Factor #4: Your History With the Lender
Hard money lenders like to work with borrowers that have demonstrated strong business acumen and integrity in the past. This is why it pays to repeatedly work with the same hard money lender over time.
A good reputation can lead the lender to reduce the amount of cash you need to put up for a down payment on the property.
While hard money lenders don’t rely on your credit history the same way a mortgage lender or commercial lender does, your history with that lender is an important factor.
Factor #5: Interest Rate
Hard money lenders look at every deal from a risk-vs-return viewpoint.
Their potential risks (in order of importance) include:
- You defaulting on the loan fully or partially
- Opportunity costs (i.e. lost income) from having capital on hand that they have not loaned out
Their potential returns (in order of importance) include:
- The amount of net interest income they earn from the loan. This is determined by the interest rate on your loan, minus the cost of that capital incurred by the lender (either a lower-cost loan, or a cost of equity investment)
- Any fees, such as up-front origination fees, transaction fees, late fees, wire fees, etc.
- Any profits from liquidating the collateral. Many hard money lenders are experts at marketing and selling real estate, securities and other liquid collateral obtained from defaulted loans.
- Future loan opportunities if the first deal goes well
If you want to reduce your down payment on a property deal, then the lender will need to finance more of the deal (lower LTV%) and offset the increased risk somehow. This is usually done by charging you a higher interest rate.
Factor #6: Your Negotiating Skills
As in most business deals, key elements of a hard money lending relationship are always negotiable. This includes the amount of down payment you put up.
Working with multiple hard money lenders can give you a negotiating edge. Simply having multiple financing options to choose from can reduce your down payment amount.
Clearly communicating the pros and cons of your real estate deal is another way to strengthen your negotiating power. If you can present a high-return deal to the lender then you can often get financed at a higher LTV %.
Have Somebody Else Put Up the Down Payment
Up to this point, we’ve assumed you as the investor have put up the down payment cash. But this does not have to be the case.
Beyond the interest income earned, hard money lenders mostly care about their ability to quickly liquidate a property at full value in case you default.
They assume a sizeable discount from market value to ensure they can sell the property and get their cash back. This is why you rarely see LTV above 90% on hard money loans.
The point here is the hard money lender doesn’t really care WHO bears the risk for the other 10-30% of the capital, as long is it’s not THEM. This 10-30% is the cash down payment required.
If you can find another investor, friend or family member willing to put up all or part of that 10-30% down payment, then it reduces the down payment you need to put up. The hard money lender will just treat the deal as if there are two borrowers, both putting the property up as collateral for the loan.
Splitting a down payment with another party requires that down payment to be cash equity, not a loan.
The Risky Option: Borrow the Down Payment
Hard money lenders are not willing to accept borrowed money secured by the property as part of the down payment. This would put the hard money lender in a second mortgage position, eliminating their priority to quickly liquidate the property if the loan defaults.
You can still borrow all or part of the down payment on a hard money-financed deal. To do this you will need to prove three things:
First, you need to prove the loan used to fund the down payment is not secured by the property itself or any collateral attached to the deal. This means it must come from an unsecured personal loan, a line of credit or credit card.
Second, you need to prove the deal economics are still profitable for all parties. Borrowing the down payment will decrease the cash flows and increase the risk of the deal. You should only borrow the down payment if you have a wide expected profit margin on your real estate project.
Third, you should share all the facts with the hard money lender. Most credible lenders primarily care about the deal economics first, and value of the real estate collateral second. They want to know they will get paid with interest on the money they lend. They tend to be hesitant to work with borrowers who are not forthright about how much cash is going in and out, and how much leverage is built into the deal.
Beware of Predatory Hard Money Lenders
Don’t forget that there are hard money lenders who act as predators. These lenders will market hard money loans without a down payment required.
Most of the time, these offers are good to be true. If something minimal goes awry, or a payment is “missed” when it wasn’t, they will quickly cancel the loan or ratched up the fees and interest rate until you cannot pay. They will then sell the property or keep it and develop it themselves to pocket big profits.
If this happens, you may have little recourse. Most hard money lenders will only finance another company like an LLC or C corporation. This makes the loan business-to-business and removes it from most state and Federal consumer law protections.
Make sure you conduct your own research and due diligence about the hard money lender first. It’s better to have to make a down payment and pay reasonable terms rather than suffer in the hands of an abusive lender.
Hopefully, this article gave you some solid information on estimating down payments for hard money loans, and how to structure a deal so it fits your needs.