How many times have you read blog posts claiming that hard money lenders are more willing to offer 100% financing than traditional banks? The concept of 100% financing is often misunderstood throughout the financial industry in general, but more specifically in hard money lending. Suffice it to say that it is nearly impossible to get every penny you need for a new project exclusively through loans.
So what does it mean when a hard money lender claims to offer 100% financing? There is no hard and fast answer. Lenders do things differently. The key is to look at the fine print. It is in the details that you find out what a lender really means.
The Problem with 100% Financing
Actium Partners, a Salt Lake City hard money firm with expertise in real estate lending, says that it is rare for a hard money lender to offer true 100% financing. They explain a fundamental problem: a 100% financing deal, in its purest form, puts all the risk on the lender’s shoulders. Even deals with strings attached shift more risk to the lender.
This is why hard many lenders tend to do the same things banks do in that they loan only a certain percentage based on the value of the asset or project being funded. They calculate something similar to the traditional mortgage lender’s loan-to-value ratio. This reduces the lender’s risk while simultaneously requiring the borrower to have some skin in the game.
Different Financing Options
Knowing that lenders rarely offer true 100% financing only leads us back to the question of what they mean when they advertise such financing. There are quite a few options. Again, things differ from one lender to the next. Here are some of the possibilities:
The Entire Deal
The first option is one in which the lender actually does finance the entire deal – asset acquisition, rehab, and loan costs. However, there are a couple of caveats here. First, these kinds of deals are almost exclusively for real estate acquisitions. Second, they are rare. Third, they are usually only offered when the after-rehab value (ARV) of the desired asset exceeds the amount of money being requested. Such opportunities are hard to come by.
The Asset Only
Sometimes a 100% financing deal applies only to the asset being obtained. Imagine a real estate company that makes its money flipping houses in Salt Lake City. A lender might offer to finance 100% of the cost of acquiring the property, but nothing more. It would be the borrower’s responsibility to cover loan costs and rehab out-of-pocket.
This sort of arrangement can be helpful to borrowers in their quest to close real estate deals in short order. They can quickly obtain the cash to buy a desired property and then use other assets, or tap into liquidity, to cover the remaining costs.
Rehab and Loan Costs
Still other lenders define 100% financing as financing that covers loan costs and rehab completely. Borrowers are still required to put a down payment on the asset being obtained. Such a deal can still facilitate quick acquisition, but it requires less liquidity on the borrower’s part.
At the end of the day, true 100% financing via hard money loans is rare. Lenders have to be careful about their own risks, so they are reluctant to embrace a financing package that shifts all the risk to them. If you are considering a hard money loan that claims to cover everything you need, be sure to dig into the details. It might not be what you think it is.