Some aspiring homeowners get by with FHA financing for their first home. Since this type of mortgage only asks for a 3.5 percent down payment, it is manageable for people who do not have plenty of resources. As long as you are under the acceptable debt-to-income threshold, you can quickly get an affordable mortgage with a small down payment.
Buying a property you intend for investment, however, is a whole other matter. If you intend to set a home up for lease, you would need to pay a sizeable 25 percent down payment. In some areas, that could be a hefty sum. For example, a typical Fort Worth home will set you back $230,504, meaning you need to invest $57,626 right away. That is money you can spend on repairs, renovations, and new furniture, among others.
Investment Homes: Financing the Down Payment
There are hard money lenders for people who don’t have access to that amount all at once. Hard money loans might give you funds for a 15 percent down payment and 100 percent for the rehab budget, provided everything falls under 75 percent of the after-repair value (ARV).
For example, suppose the home costs $230,504. The down payment on it would be $34,575.60. Then, suppose your budget for the rehab is $55,000. You would then have a total loan amount of $140,928.40, the down payment plus rehab budget subtracted from the home’s total cost. If your home gets an appraised after-repair value of $290,000, that means your total loan should be less than $217,500, which is 75 percent of the ARV amount.
$34,575.60 is not a small amount of money, but it is considerably less than the $46,100 to $57,626 homeowners would pay if they get a conventional loan with a 20 to 25 percent down payment.
What Else to Know About the Hard Money Loan Process
Besides down payment money, points, and lender fees, you would need to set aside a little more cash. You don’t want to purchase the home and then find out you have no money for the rehab phase. The monthly payments a borrower makes cover only the interest of the borrowed capital. However, he must pay back everything once the loan expires.
As such, buyers must note that it’s better to leave some money for themselves and not pay contractors the total amount upfront. Some would even argue “no money down” until the job gets completed. Whatever you choose should be based on how much you trust your contractor and whether you’re willing to risk the cash you have.
Finally, hard money loans are not the only type that homeowners can apply to finance their homes. However, they are among the most convenient ways to get the funds to buy a house. Hard money loans give you a lower down payment and provide the option for funding rehab. Though the interest rates are a bit steep at approximately 9.9 percent, you will still have the property you want at an affordable price.
Purchasing a home always involves calculated risks. When you’re buying a house, you have to account for the initial payment, the monthly installments, points, and additional fees. Get the funds for your home by exploring options like hard money loans, which give you the cash you need without you needing to wait for too long.
Let DFW Investor Lending help you find—and fund—the house of your dreams. We save our clients thousands of dollars on their deals, and our Dallas hard money loans have affordable, competitive interest rates and origination fees. We serve the Dallas-Fort Worth metroplex, including Irving, Garland, and Plano, TX—contact us today to learn more.