Hard money loan understanding

[Alon A.]

Hey guys 

I would like to understand something 

Purchase price: $270K

Reno: 70K

ARV: 420K


My lender fund 75% from ARV which is 315K , it covers the purchase price  

also he covers 100% or rehab , I need explanation about the rehab , why should they cover for me 100% of rehab , what are they gaining from that ? 
eventually I spend money from my pocket on the remodeling and everything is coming back for me , what is the catch here ? They really financing 100% of remodel , if this is the case , even if the remodel will be 100K so why to save on remodel costs ? I understand the draw process and I have the money in the bank , so as long I can finance it by myself before the draws I’m good ? 

Please help me understand it

thank you 

[Steven Goldman]

Good morning: Most rehab lenders charge interest on the entire loan regardless of whether you use the construction hold back or not. The lender finances 100 percent of the construction costs because the entire business model is dependent on your achieving your ARV so that you can exit the bridge loan and refinance or sell the property for a profit. The profit or refinance is your exit strategy that permits you to pay them back, since the entire loan exceeds the present value of the property. So you make less money then working out of your pocket because you are paying interest on the construction hold back from the time you draw the money. Some private lenders will lend you 100 percent of the purchase price and rehab. costs. You only have to contribute closing costs. Those lenders usually charge interest from the day of settlement on all of the money and many do not hold back the renovation funds. (Very risky which is why they charge higher interest rates and often more points.)

The  lender funds 100 percent of construction cost to inure that you will have adequate funds to put into the property. You often exceed that number because the lender can not plan for all hidden contingencies and change orders. Its just a underwriting formula that they have created which fits into their credit risk policy. (Credit risk is the potential for the borrower to default) I hope that helps you see the big picture from the lenders perspective.