Can I use hard money as a down payment on a commercial loan?

6 Replies

I've never used hard money lender before, I was wondering if it's fairly common to use a hard money loan for a down payment on a commercial mortgage. I understand that hard money is generally geared towards the purchase of a property so let me give you the scenario I have in mind.

I'd like to get into larger multi-family but the up front capital is holding me back. My plan is to use a HELOC to secure a hard money loan. Then use the hard money loan to secure a commercial bank loan. Am I crazy? Does this work?

Originally posted by @Tyler Hardy :

I've never used hard money lender before, I was wondering if it's fairly common to use a hard money loan for a down payment on a commercial mortgage. I understand that hard money is generally geared towards the purchase of a property so let me give you the scenario I have in mind.

I'd like to get into larger multi-family but the up front capital is holding me back. My plan is to use a HELOC to secure a hard money loan. Then use the hard money loan to secure a commercial bank loan. Am I crazy? Does this work?

 What is your scenario first.  What are you trying to do?

@Tyler Hardy A lot of this depends on what size building you talking about and what type of lending institution. 

Most banks and lenders will not allow you to borrow the funds for the down payment using secured debt as that will throw cashflow off and affect the DSCR. Some may allow this but most will not. You will also need to be able to show net worth equal to the loan and cash reserves. All this will depend on the lenders requirements so you will need to talk to several.

The best thing to do is raise the equity portion from investors and line up a KP for the net worth requirements If you need that box checked.

Bank will typically want it sourced and vested from you, they understand the notion of leverage so seeing that it's a second mortgage would not make you a very desirable lending candidate.

This is exact info I needed. Thanks for all of your help. I understand that a hard money lender would want first position but I didn't think about the primary lender wanting to trace the down payment. I was planning on using this strategy to take on larger opportunities with less up front capital. But it sounds like that HELOC would be better served as incentive for a partner. Thanks for the help BP!