Hard money lenders are in the business of making cash available when time is of the essence or banks will not help. Hard money is used to invest in real estate, fuel business expansion, meet short-term cash flow problems, etc. Most importantly, it is based on collateral.
Borrowers new to the hard money game often make the mistake of asking for 100% of the funding they need. They quickly learn not to do that again. Asking for 100% is a virtual guarantee of being denied. It might also make it more difficult to borrow in the future.
If you are new to hard money, here are four reasons to never ask for 100%, compliments of Salt Lake City-based Actium Partners:
1. You Won’t Get It
First and foremost, you are not going to get it. Hard money lenders differ from banks in some ways, but they are similar in others. One of those similarities is lending on a loan-to-value (LTV) ratio. LTV is a measure of the amount of money loaned as compared to the value of the collateral offered. Whether the collateral is a piece of property being acquired by the loan or something entirely separate doesn’t matter.
The fact is that hard money lenders are reluctant to exceed their established LTVs. This is for their own protection. In the event of default, they have to be able to sell the collateral and recover all of their costs. The higher the LTV, the harder that is.
2. It Demonstrates Inexperience
The second reason to never ask for 100% is that doing so demonstrates a lack of experience. An experienced real estate investor knows that hard money lenders average about 65% LTV. To ask for 100% demonstrates an investor does not know this. That puts a little bit of doubt in the mind the lender. If a potential borrower doesn’t even understand the basics of hard money lending, there is reason to believe said borrower doesn’t really know what he’s getting himself into.
3. It Raises Financial Questions
Reason number three is one of raising financial questions. A borrower looking for 100% financing is telegraphing to lenders that he doesn’t have enough cash reserves to make a down payment. Hard money lenders don’t like this sort of arrangement any more than banks do. Requests for 100% funding raise legitimate questions about whether or not the borrower’s finances can truly support borrowing.
Financial questions are a bit more concerning to hard money lenders because their loans are short-term loans. Borrowers typically have to make higher payments with less time to pay off loans at higher interest rates. So any doubts of financial stability can lead to application denial.
4. It Puts All of the Risk on the Lender
Last but not least is that 100% funding puts all of the risk on the lender’s and shoulders. That is no way to approach a hard money lender with whom you have never done business before. Lenders don’t mind assuming the majority of the risk, but they certainly don’t want to assume all of it. They want clients to have some skin in the game.
Lenders are smart enough to know that borrowers who assume no risk also have less incentive to make good on their loans. On the other hand, requiring borrowers to put up some of their own money provides all the motivation they need to not default.
If you are ever in the market for hard money, remember this: don’t ask for 100%. You’re not likely to get it, and asking could doom your chances of future borrowing.