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Figuring out whether or not you can get 100% financing on your hard money loan doesn’t have to feel like rocket science. To lend a hand, I’ve put together a fast, simple formula to help investors figure out in seconds if their deal has a shot at being financed 100% with a quick hard money loan from Do Hard Money.
Any investor can use this formula in seconds to accurately determine if the deal they’re looking at lands somewhere in the ballpark of 100% financing options. You might be surprised by how many deals make the cut.
How Do Hard Money Loans Work?
Hard money loans are specifically designed for real estate investors like you. Instead of going through a long, tedious process of getting a mortgage for a property you don’t intend to keep, you get a hard money loan that secures the money you need to fix & flip a property quickly.
Typically hard money loans are used for rehabbing properties that are intended to be sold at a profit but some investors also use them for fixing up rental properties. These types of loans are known as BRRR loans are they’re a little bit different but overall have the same concept.
The Difference Between a Hard Money Loan and a Mortgage
- A mortgage is a long-term loan that you take out from a bank or other lending institution while a hard money loan is a short-term loan that you take out from a private lender.
- A mortgage has a fixed interest rate, while a hard money loan may have variable interest rates.
- A mortgage requires a down payment, while a hard money loan does not. The hard money loan uses your investment property as collateral.
- A mortgage typically has a longer repayment period than a hard money loan. Hard money loans typically max out at five years.
- Mortgages will take a few weeks or months to get through. Hard money loans typically take a few business days to fund.
- Mortgages require extensive paperwork, credit scores, employment history, etc. while hard money lenders typically don’t care about that stuff. Instead, they look for Scope of Work, After Repair Value (ARV), and your previous track record with real estate investing.
One quick thing about this last point: If you don’t have experience with fix & flips or other real estate investing that doesn’t mean you won’t qualify for a hard money loan. Many lenders (us included) work with first-time investors.
What Exactly Is 100% Financing?
When we talk about 100% funding here at DHM we are referring to our loan program where we cover 100% of the property purchase, 100% of the rehab costs, and 100% of the loan costs.
100% financing includes:
- the cost of the property
- the cost of repairs
- the cost of the loan itself
The Formula for Calculating 100% Financing
To calculate what your 100% financing rate would be, we use this super-simple formula:
All costs ≤ 70% ARV = 100% financing
That’s it! That’s the whole formula.
DoHardMoney will lend up to 70% of the after repair value of a property on most loans so, by spelling out each of the three costs, we can rewrite this equation like so:
Property Costs + Rehab Costs + Loan Costs ≤ ARV = 100% Financing
If those three costs are equal to or less than 70% of the after repair value of the property, then you have a very high probability of receiving 100% financing with DoHardMoney.
Property Costs vs. Rehab Costs: What’s the Difference?
There is a big difference between the costs of property ownership and the costs of rehabbing and restoring a property. Property ownership costs include the down payment, closing costs, and monthly mortgage payments. Rehabbing and restoring a property can cost many times more than just buying or owning the property outright.
Costs associated with rehabbing or restoring can include:
- Hiring an architect, contractor, and other professionals to carry out the work
- Cost of materials (e.g., Sheetrock, flooring, windows)
- Permits and inspections
What’s a Loan Cost?
Loan costs are what lenders charge you for the privilege of lending you money. I know that “privilege” doesn’t sound great, but it’s just a term that means the costs we incur to issue you the loan and ensure we keep our lights on, too. The loan costs can include origination fees, interest rates, and other charges.
How Can Loan Costs Be Part of the Loan Amount?
It may have struck you as a little strange that I factored the costs of the loan (points and interest) into the loan amount. If you did a double-take then congratulations, I know you’re paying attention.
This is actually a special service that DoHardMoney offers which most lenders do not because I understand that investors need all the cash they can get while they’re in the middle of their flip, I’ve designed our loans so that all loan costs get held in escrow until the flip is complete.
This means you make no payments on your loan until the flip is done and your big check from selling the property is in the bank.
How to Get 100% Financing with DoHardMoney
Anyone can get a typical hard money loan from DoHardMoney, but we reserve our 100% financing options specifically for investors who join one of my membership programs — programs such as the Find-Fund-Flip program.
The reason why we require this is because of the risk involved to us, the lender. Hard money lenders assume substantial risks as it is by lending without credit checks and other traditional approval measures, but those risks increase even more in 100% financing situations.
Our way to reduce the risk when we finance 100% is to make sure that our investors get some sort of real estate training from us. We see it as a win-win.
The program makes our financial investors confident enough to let us provide this much-needed service, and REIs of all experience levels emerge from the program much more investment-savvy.
If you’d like to learn more about the program, click here to start your application and speak to one of our representatives about your investment property. If not, I think you’ll find the formula I’ve offered here helpful when you’re making decisions in all sorts of lending/borrowing situations.
Any tips you think our readers should know about hard money loans that I missed? Leave a comment and let me know!