If there’s one request that hard money or private capital lenders don’t like receiving, it’s an application from a borrower who wants 100% financing for their project. Here are three reasons why this kind of request will immediately elicit a reluctant response from your prospective lender:

1. It signals that the borrower is probably inexperienced with real estate investment. Experienced real estate investors know that private capital lenders typically offer 65% LTV (loan-to-value) hard money loans. Therefore, requesting a 100% LTV loan shows that a borrower likely hasn’t made many, if any, deals before and this inexperience may lead to mistakes that could cost the borrower additional funds and ultimately jeopardize the entire project.
2. It indicates that the borrower’s personal or business finances may be lacking. A request for 100% financing immediately leads a lender to question the borrower’s financial strength. If the borrower is unable to commit cash to the project initially, how will they make the interest payments during the term of the loan? What cash reserves do they have in the event that unforeseen issues or costs arise during the project, especially if there are improvements to complete? Private capital lenders need to have confidence that a borrower will pay back their loan just as much as a bank lender does.
3. It requires the lender to assume all of the risk. Hard money loans tend to be offered for projects that are too high risk for conventional lenders; one of the ways in which private capital lenders offset the risks inherent in these projects is by requiring the borrower to have sufficient equity (typically at least 25%) invested in the project so that the borrower is as committed to seeing the project through as the lender is. Private capital lenders want borrowers who are going to succeed in realizing their vision so that both parties reap a good return on their mutual investment.

On the converse side, if a lender is promising you 100% financing, borrower be warned: it is likely a scam. See our previous blog on red flags  that indicate you may be dealing with a fee-collector or a broker rather than a legitimate private capital lender.

Even though reputable hard money lenders are unlikely to offer 100% financing, this does not mean that it isn’t possible to structure a hard money loan that will cover a good portion of your purchase price or that will include money to cover rehab costs or interest payments during the term of the loan. But borrowers need to be prepared to have some of their own skin in the game so that it isn’t easy for them to simply walk away at the first hint of problems with the project, leaving the lender with property rather than a return on their investment.

If you have more questions about hard money loans and our LTV rates, contact Montegra at 303-377-4181.