What does 100% financing mean to lenders? Does it sound good or bad? Well, getting a 100% financing is almost too impossible, especially if you are a new prospect. So if your lender just turned down your application, here are some reasons you must know why such application is disappointing to lenders.
Financial incapacity or insolvency risk. When a new borrower states that he or she needs 100% financing for an investment property, lenders are typically hesitant in providing the cash. Of course, for most of lenders it tells a great deal about the borrower. Aside that it puts lenders at big risks; it puts the financial strength of the borrower in question. Why do you need a 100% financing if you can afford to pay? Perhaps, the borrower is not financially strong.
100% financing implies that you probably have little cash to commit to the project and may not be able to pay the loan later on. Lenders also come to doubt if you have cash reserves and your timeliness in paying back.
Less real estate experience. Borrowers who expect to get hard money loans have not probably done many deals. Since the borrower is less experienced, it is likely that he will commit mistakes that may cause a lot of money in the long run. Individuals who have more experience in real estate usually don’t not opt for 100% loan to value (LTV) for the first time. Field experts know how to ask for an ideal price and have already figured that lenders do not provide hard money loans.
All-risk assumed by the lender. It is basically a huge risk for lenders, and most of them do not want to take a risk on something they are sure of the return. Hard money loans are asset based, which means that the loan secured by a real estate mortgage. In case the borrower defaults in payment, the mortgaged property will answer the loan. But there are times when the real estate mortgage is not sufficient due to some economic downturns. That’s why lenders first make sure that the borrower has equity over the property of usually at least 25%. Otherwise, lenders would be assuming all the risk and loss arising from such transaction.
As you see, a hard money loan is not such a good option especially for starters. And the reason why lenders nowadays are very careful when it comes to 100% financing is that they have already been victimized by a huge fall down in the past. Hard money loans were responsible for the collapse of the real estate market in 2007. When the real estate market was declining, many hard money borrowers decided to walk away from their properties after realizing that they have already owed more money in the bank than what their property was worth. As many properties end up in foreclosure, the real estate turn down stabilized and took the overall American economy down with it.