The issue of down payment is always stressful especially to investors who have not much in their pockets. Few hard money lenders Houston Texas offer facilities to clients without asking for a deposit. The prime reasons why getting advance money from the client is important include the following:
Insurance for risks
Some firms use this amount to cushion themselves against defaulter risks. Every lender is in for business, and therefore it is important that they reduce risks as much as possible. The amount might be paid to an insurance company or put into other investments.
In some jurisdictions, it is a requirement that firms acting as proxy lenders demand a certain percentage of deposit on every loan. This law however does not apply in many regions and firms will only take advance payment because of personal agreements with the lenders on whose behalf they act.
As a motivation
A few lenders believe that borrowers are likely to work harder when they pay deposit. Research has shown that there might be some truth in this. In the end the pressure benefits both the lender and borrower.
Your credit history could also determine whether you get to pay a deposit or not. When lending to you directly from their resources, some of hard money lenders Houston Texas are less likely to ask for down payments from clients whose records are clean since they do not consider them a flight risk.
Even when they do levy these charges, the rate will be a bit lower than for clients with higher credit rating. If for instance, the maximum deposit is 30 percent for those with spotty records, people whose testimonials are clean might only be required to pay between 10 and 15 percent. This is part of the reasons why it is important to provide detailed information about your past borrowing especially if the details are impressive.
Don’t confuse deposit with financing gaps
Deposits are not the same as financing gaps. While not all lenders will ask for a deposit, each and every one of them want to be sure that you are committed towards the goals that you have set forth and that the said goals are achievable. To do this, they must confirm that you have enough money to cover up for the rest of the project after they have given their input. This should be about 30 or 40 percent of the total final property value.
Another situation where financing gaps may come in is when your valuation calculations do not match up to that of the company’s agents. The valuators usually use the information you provided in your own calculations together with their own observation to make their own assessments and recommendations, which the lender will work with.
If these are lower than what you calculated, the lender will only be willing to give you an advance based on their calculation, but will still expect you to raise the extra funds first so that the final value matches up to your previous sum.