I recently started my first flip in San Antonio, and I took out a hard money loan from Sherman Bridge. I qualified for their 90/10 plan which means the loan is for 90% of the property purchase price and rehab cost.
90% of (Property Price + Estimated Rehab cost)
At closing, part of my down payment is the 10% of (Property Price and Estimated Rehab Cost).
Fast forward a few weeks and I request my first draw for the rehab money. Unfortunately, I find out that they will only give me 80% of the approved draw amount, and that the remaining 20% of the rehab cost is my sole responsibility. For example, I was approved for $4,051 but they will only fund me $3,439.80.
Does this seem right? Is there something that I am missing? The way i see it, i already paid my 10% up front at closing, why should I be responsible for an additional 20% of the rehab cost?
Any clarity on the matter would be appreciated.
Yes. Most of us loan up to 80% of purchase price and up to 80 % of estimated rehab, to a maximum loan amount of 90% of purchase price.
It sounds like whoever sold you the loan didn't fully explain the terms and process to you. In my experience with HM loans, I have always had to bring cash to close beyond my original down payment/ earnest money, unless the lender rolled the points, closing costs, interest, etc. into the loan (which is not typical). Your total loan amount will determine the actual percentage of acquisition + renovation costs. So if your purchase price was $50k, total estimated renovation cost is $20k, and your total loan amount was $63k, then you get a 90/10 loan.
As for the draw process the majority of HM lenders require you to get a percentage of the renovation work completed (and paid for), then you submit a draw request. Their inspector will verify the work completed and they will issue a draw based on their opinion of percentage work completed. Usually a draw request costs $100 - $150 for the inspector to verify the work.
What you described of the lender approving one draw amount, but only funding 80% of that amount seems odd, but also should have been explained by your agent prior to taking out the loan. As long as by the end of the project you have been funded the full escrowed renovation amount (meaning the full loan amount), then I don't see a problem with the policy.
I think I would look at my total loan amount, subtract my acquisition cost, and determine what the remaining amount is and confirm that is escrowed for the repairs. If there are still additional funds needed to complete the renovation (and there likely will be), this is always the responsibility of the investor.
If you complete the project and you have not be reimbursed thru draws for the entire loan amount then that's seems like a big issue...as you are paying interest on the full loan amount.
Good Evening John! I'm happy to speak with you next week if you would like. I will review your file on Monday and have a discussion with your loan officer but I would also encourage you to review the initial 1 page loan disclosure you signed as well as final loan disclosure and loan escrow agreement signed at closing. All of these documents also detail how the draw system works. We detail it on 3 different occasions as I want every one of our customers to understand the loan and how it works before the deal is finalized. Again, please call my office, your loan officer or our servicing department and they can put you in touch with me should you have any additional questions or concerns and we appreciate your business!
Thanks Everyone! I appreciate the help.
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