We get this question a lot regarding rehab loans. At Little City Investments, we provide hard money loans for real estate, and we often make Austin and Houston rehab loans for rentals and other non-homestead properties. You may be surprised to learn that you do not need a down payment for a hard money rehab loan.
Hard Money Rehab Loans
We are private money lenders for real estate investors providing what are called hard money loans. These loans are different than traditional bank financing because they are based primarily on the value of the property and not your personal creditworthiness. While we do run your credit and background, we have much lower credit score criteria than a bank would. We also do not verify income or ask for tax returns. We lend based on property value instead.
The catch is that hard money rehab loan rates are significantly higher than bank rates. Another catch is that hard money lenders can only lend on investment properties and cannot lend on your homestead. Banks can lend on both. So hard money loans are usually the go-to option if you have been turned down by a bank.
No Money Down Rehab Loans
Hard money loans do not require down payments because they are interest-only loans. The do not amortize and you do not pay them off over time. Hard money loans are short-term and you usually have to pay them off completely within one year. Interest payments do not count towards the payoff therefore the concept of a down payment doesn’t apply.
That said, the key to paying no cash out of pocket for a rehab hard money loan is to either have a decent amount of equity in a property you already own or be purchasing the property for less than 70% of market value. Since hard money lenders typically lend up to 65-75% loan to value, if you owe less than that or are purchasing at less than that, then you would not need to bridge the gap with your own cash.
Pay Attention to Hard Money Terms
Many hard money lenders do require “skin in the game.” i.e. They make you put in 10-20% of your own cash to prove you’re serious about performing and capable of paying the loan. At Little City Investments, we do not have this requirement. For us, it is enough for us to be at our required loan to value. This allows us to liquidate the property quickly if the borrower defaults.
Also keep in mind that you will always have to pay certain closing costs such as points, documentation fees and title insurance. These items do add up. Make sure you ask your lender to estimate your net proceeds for the rehab loan so you don’t get surprised at the closing table.
Little City Investments wants to be your go-to hard money lender. We fund rehab loans across Texas and have offices in Houston and Austin. We do not require you to pay out of pocket as long as the value and/or equity is sufficient! Request a loan today.