Down Payment on Hard Money

[Cosmo Iannopollo]

When using hard money, how does the down payment work? Given that it's a reno and they seem to lend on ARV, the purchase price of the house is essentially taken care of. Do you then cut a check to the lender at closing?

[Tae C.]

@Cosmo Iannopollo

I was confused as well not too long ago, but have a better understanding now. So using real numbers as an example...

If the hard money lender's terms say they will loan up to 70% ARV and up to 90% LTC (overall cost of purchase price and rehab combined), and 3 points...again all just as an example, here are hypothetical numbers:

• purchase price - 75,000

• rehab cost - 50,000

• ARV - 185,000

In this case, the 75,000 + 50,000 = 125,000 which happens to be only 67.5% of ARV (125,000/185,000 = 67.5%). However, this does not mean that the lender will finance 100% of your project just because it falls under the 70% ARV (I used to get confused on this part). You will still have to pay 10% of the 125,000 to adhere to their 90% LTC policy, so that means $12,500 for down payment.

This leaves you with an actual loan of 125,000 - 12,500 = 112,500. So then the 3 pts that the lender charges means you take 3% of the 112,500 = $3375. This number typically is added to your upfront costs, so now you’re looking at $12,500 of down payment plus $3375 of lender pts all to be paid upfront at closing. And whatever other random fees, if any, there might be between lender/escrow agent. 

Hope that makes sense.