What are Hard Money Loans? How to Get 100% Financing through Hard Money Loans Explained
If you’re wondering how to get 100% financing for a real estate investment purchase, we’re here to help! Finding 100% real estate financing can be difficult, particularly because most private money lenders will avoid this level of risk. However, through using 100% hard money loans, we’ll explain possible ways to overcome this problem. This article deals with hard money loans from private lending companies in regard to real estate investments.
In this guide, you’ll learn about:
- Why is 100% financing so hard to find?
- What if I’m getting a good deal on a property?
- How can I get 100% real estate financing?
- Alternatives to 100% Real Estate Financing
- Loan-to-Value Options
Why is 100% financing so hard to find?
100% real estate financing is rare and difficult to find because most private lending companies consider it far too risky. If you aren’t putting any of your own money into an investment, it’s very easy for you to back out of the deal and give up on a property at the first sign of trouble. Lenders don’t want to deal with the property themselves, and so the possibility that you will leave them stuck with the property is too risky for private money lenders to provide 100% financing. After all, there is a reason that private money lenders are not real estate investors themselves. They don’t want to look after properties and deal with the consequences of that investment; rather, they want to lend money and fund someone else’s investment. If a private money lender was willing to pay for the full price of the property, they might as well invest in the property themselves!
What if I’m getting a good deal on a property?
If you’re buying a property for below market value, it’s understandable to think that you may have an easier time getting 100% financing. After all, you found a great deal! Unfortunately, this is typically not how it works; even if you talked to every single lender in our hard money lender directory, you’d be hard-pressed to find one willing to loan 100% of a property’s purchase price. Private lenders typically consider the purchase price to be the value of the property, regardless of the real or perceived value.
It’s important to know the difference between LTV and LTP. Both ratios measure the risk a lender is taking on with a loan for a property.
LTP: Loan-to-Purchase Price
If you don’t plan to add any value to the property you are purchasing during the term of the loan, private lenders will focus on the purchase price and measure their risk using LTP. A common mistake among real estate investors is focusing too much on LTV when the private money lender is considering LTP regarding hard money loans.
How can I get 100% real estate financing?
If you are trying to purchase an investment property that won’t be dramatically improved during the term of the loan, you need to use cross collateralization to get 100% financing for the property. Essentially, instead of using cash to provide collateral, you must have another investment property with enough equity to offer as collateral. If you don’t have a mortgage on the property that you already own, you can purchase the new property with up to 70% of the first property’s value. The lender will then take a 1st position on the new property, and a mortgage on the property you already owned. Most lenders will not accept a property that already has a mortgage as collateral, as they would have to take a 2nd position on the mortgage, but those that do tend to have higher pricing, such as interest rates ranging from 10% to 15%.
Unfortunately, not all private lenders offer this option, and those that do will often take longer to close on the deal. Since speed is such a large factor in today’s hot real estate market, Some could say that this method does not truly count as 100% real estate financing, considering that you need to have another investment property as collateral, but it allows you to buy a property despite not having a cash down payment regardless.
Alternatives to 100% Real Estate Financing
Another option is to use a seller carry-back to get higher leverage in purchase bridge loans. The seller uses a 2nd mortgage to cover the distance between the purchase price and the maximum LTV of the private lender. However, this option does not cover 100% financing because private lenders will only consider it if the borrower is contributing some of their own personal cash. It may be possible to find a lender who can fund up to 70% of the purchase. The investor typically needs to contribute at least 10-15% of the purchase price, and the minimum hard money loan amount is usually one million dollars. Unfortunately, this will not work for purchasing residential properties.
If you can’t get 100% real estate financing, you may be wondering what other maximum percentage LTV you can get. For short-term hard money loans, the maximum LTV is typically 70%, though some lenders will occasionally go up to 75%. The exact LTV may also vary depending on location, property type, or lender preference. For example, vacant land has a maximum 50% LTV. However, private lending companies such as Hard Money Lenders will sometimes consider long-term financing of 5, 10, or even 30 years for residential properties. Depending on your credit score and the market, these long-term options can have a maximum LTP as high as 80%.
Although it is hard to get 100% real estate financing, through private money lenders and hard money loans, suitable alternatives can be found. If you have another investment property to act as collateral, particularly if there’s no mortgage on that property, then some private money lenders may consider this acceptable collateral rather than a cash down payment. An alternative to this process is to try using a seller carry-back, which is not quite 100% financing as the investor contributes 10% to 15% of the value, but still provides more leverage. Otherwise, you can use hard money loans to find a high LTV, often going up to 70% or 75% financing, though the precise LTV may vary depending on the private money lender or the property in question.
Adam Smith has spent the last 5 years in the Private Money Lending world helping real estate investors secure financing for their non-owner occupied real estate investments. When he’s not thinking about real estate, Adam is an avid Jazz music fan and fisherman.