Tucson, AZ · Member since 2014 · 64 posts · 13 votes
Hey there BP community,
Christian here,
Quick Question. Can you use your personal homes equity as "skin in the game" in a hard money loan?
I have been trying to improve my credit to a point where i can get the equity out of my home. I will then use my home equity as a down payment to get my hard money loan.
I already got pre-approved for a hard money loan for my first flip but cant come up with the 20% of what i got approved for.
I know its risky considering this is my first flip but i know I am super conservative on my numbers and have done exponential research (about 2 years) on the subject of finance so I would like to believe I know about 5%.
If anyone could help me own I would highly appreciate your expertise.
Contractor · Interlochen, MI · Member since 2015 · 10 posts · 2 votes
11y
Christian,
Use your personal home's equity very conservatively. I would always retain at least 30% equity in your home. Remember what happened 6 years ago. Good luck.
Contractor · Interlochen, MI · Member since 2015 · 10 posts · 2 votes
11y
Christian,
Use your personal home's equity very conservatively. I would always retain at least 30% equity in your home. Remember what happened 6 years ago. Good luck.
Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
11y
I completely agree with @David Roberts. Better to get an experienced cash partner and give up some profit in return for some hand holding on your first few deals. It's much less risky than potentially losing your personal residence. Strictly speaking though, and your state law notwithstanding, what you're proposing can be done legally by most HML's.
Contrary to what many believe, the criterion is not whether you live in the house but the use of the money. In your case, you will be using the cash to flip homes and that makes this a business purpose loan – the realm of most HML's.
The problem I see is that most HML's will want to be in first position and if you already have a first on your home, this will be difficult. Plus, as @Dan Pohlman suggests above, a high CLTV (combined loan to value) could also preclude any additional loan and is potentially dangerous.
In my view, your second best bet behind getting a cash partner would be to wait and get a conventional HELOC on your home, once you get your credit straightened out. With enough equity in your personal residence, this could be a good source of family emergency money as well as cash you can use in your business. You can borrow or repay anytime you want and HELOC interest rates are substantially lower than from any HML you'll find.
Lender · Faulkner, MD · Member since 2015 · 118 posts · 28 votes
11y
There are some very different schools of thought on this subject. I've been to boot camps and seminars where they said if you've got equity, you should be maximizing it by using it to buy other properties.
I've also got family members that have several properties that would NEVER in a million years jeopardize the place where they live.
I think both have their merits and it's up to your acceptable level of risk and your sense of adventure.
Tucson, AZ · Member since 2014 · 64 posts · 13 votes
11y
Thanks @Tom Potter. I'v never quite yet had the privilege to attend one of thous. I should mention I clean yards for a living. haha, making 10 bucks an hour. But i cant wait to be able to go to one.
Professional · Murrieta, CA · Member since 2013 · 405 posts · 458 votes
11y
Any hard money worth their...well, money, would not DARE take you up on your offer. It's most likely against the SAFE Act and would land the lender in tons of trouble.