Hard money loans come with a long list of misconceptions. The stigma is they are for the desperate and the financially challenged, and it’s not uncommon for consumers to worry they’re being taken advantage of if they take out a hard money loan. While it’s true these loans are for those who have a challenged credit history, it’s not the only thing a hard money loan is good for. It’s a great way to get a construction loan, to get a short-term loan, and it’s a common loan for house flippers to use when they need the cash to rehab a home they’re flipping.
Some hard money loan lenders require you pay a deposit for your loan, and this is known to confuse many borrowers. Do you need to place a deposit on a loan? Is this a sign of a shady company looking to steal your money and not give you the loan you need? How much do you put down as a deposit? Do you get your deposit back? Is this normal? These are just a few of the most common questions people have regarding hard money loans and deposits, and the answers are a lot simpler than many people realize.
Do I need to pay a deposit to a hard money lender?
The answer is yes and no. Some lenders require you pay a non-refundable deposit prior to being approved for a hard money loan. Others don’t require you pay a deposit, but it all depends on how much you’re borrowing as well as the type of loan you’re looking to secure. For example, if you’re looking for a single-family home loan from a hard money lender, you aren’t required to pay a deposit. You’re most likely a credit-challenged individual looking for an approval with which to purchase a home, and lenders will not charge you a fee or deposit to secure a loan of this nature.
If you are working on a flip loan to rehab a property and sell it for profit, you might be required to pay a deposit. It’s a non-refundable deposit, and you cannot secure your loan without it. If you’re worried you must pay a deposit, check with your lender. Most require one in many loan cases, but some don’t.
How much is the deposit I must pay?
There is no right or wrong answer to this question regarding deposits and hard money loans. There are various deposit requirements with different lenders. The general rule, however, is the deposit must be at least $1,000. It can range into the tens of thousands of dollars depending on the amount of the loan, your personal story, and the details of your loan. You won’t know for certain what you need to pay as a deposit until you speak to a lender.
The good news is you can speak to a lender prior to applying for a loan to get an idea of what you’ll pay as a deposit. You can use this information as a deciding factor to help you determine what you’re paying and whether the loan you’re considering is worth the fees required to apply for the loan.
How do I know it’s safe to pay a deposit to a hard money lender?
The answer is simple. If you’re applying for a single-family loan, you don’t need to pay a deposit. The general rule is these types of loans don’t require a deposit. If a lender is asking for a deposit before you apply for their hard money loan to buy a single-family dwelling in which your family will live, you should consider walking away and looking for another lender.
If you are making a large purchase for a commercial building, a flip house, or something of that nature, you might need to make a deposit. If you find yourself worried, the best thing you can do is compare two or three hard money loans and the requirements for each. If all the loans you look into require a deposit, you’re making a deposit. If the loan doesn’t require one with the other companies, you might consider it a safer financial bet to walk away from the lender requiring a deposit and work with another company instead.
Hard money loans are generally misunderstood by many consumers, but they can be quite helpful in many situations. Prior to applying for a hard money loan, do your homework and learn what’s required, what’s expected, and what to look for. Knowledge is power in a situation of this nature, and you cannot know too much about protecting yourself, your investments, and your finances. If a hard money loan is your only option, be sure you’re getting the best possible loan available to you in the most affordable fashion.