Do Hard Money Lenders Require Deposits?
Although the hard money loan is easier to get approved for that a traditional bank loan, it is important that you do your due diligence too when meeting with investors. Just because you need funding to cover house flippng or that investing of commercial real estate, doesn’t mean you should turn a blind eye to unsavory tactics by those looking to take advantage of you in your time of need.
Here is everything that you need to know about deposits required by hard money lenders.
Hard Money Versus Traditional Loan
When you apply for a traditional loan at your bank, there are no upfront fees involved with the transaction. Regardless your credit history or years in business, the risk department at the bank will not demand a deposit in order to process your application. There is no reasons to expect that investors of hard money loans will either. This is a legitimate short-term loan, and when papers are drawn up accordingly, there shouldn’t be requirement for a down payment.
While the investors looking to provide the hard money loan are more flexible than the local bank, they do not use that position to take advantage of consumers who may or may not be over a barrel financially.
Providing Before and After Values
The reason a legitimate hard money investor is not going to be looking for a deposit is because they will be making a fair amount of money on the back-end. In order to guarantee that this is a profitable endeavor, the hard money lenders require the borrowers to show the value of the property both before and after repairs have been made. The legitimate hard money lender is more concerned about how soon they will get their investment back and how much of an interest rate they can charge. They are not going to lose a chance at making serious money by demanding the borrower kick up a deposit.
The legitimate hard money lender will not ask for a deposit, plain and simple. If you are being told you must put up a deposit, either consider another investor or negotiate those terms better. It is just bad business to want cash up front from a potential borrower.
The Cost of the Appraisal
The hard money investors stand to make a serious profit off the bridge loans because they are in fact short-term loans. Not only is the terms shorter than a traditional loan, the interest rate can be negotiated so the investor is guaranteed a nice profit for minimal work. That being said, these investors are in the business of making money, and not every deal closes out as planned. If these investors had to lay out the cash for an appraisal of the property in question for every loan they considered, they would be taking a risk they usually will avoid. Even though the appraisal will not break them, paying for several dozen of these a year can in fact be costly.
While the hard cash lender will not ask for a deposit, they may ask the borrower to cover the cost of the appraisal up front. If the deal falls through, the lender was not on the hook for any money. If the appraisal checks out and the deal does close, then the investor may refund the cost of the appraisal on the back-end. These are terms that can be agreed upon at the start of negotiations.
Meeting Somewhere in the Middle
The investors of hard money loans are willing to be flexible for the sake of getting the deal done. In some instances, a borrower may just be starting out and doesn’t have the history to secure a traditional loan. In other instances, the borrower may have average credit with little assets. Even in the case of the latter, the investor is not going to demand a deposit, they would prefer the borrower put up more to protect the integrity of the deal.
Meeting in the middle is the unique aspect of the hard money loan that appeals to borrowers for a number of reasons. If the borrower has collateral not normally used in a traditional loan, the investor may see opportunity and allow it to be part of the deal. A legitimate investor is never going to want cash up front, it doesn’t make business sense and could jeopardize the deal from even taking place.
Hard Money Lending Deposits in Conclusion
Now that you have a better understanding of what is standard protocol as far as deposits with hard money loans, you can focus on gathering your appraisal documents and moving forward.
The best investors are interested in making money for all parties involved, so other than the cost of the appraisal, you should have zero outlay with these potential investors.