Will try not to waste people’s time with unnecessary details. Basically, I am embarking on a project where I am entitled to 50% of the property, and I am needing to use hard money to borrow fix-up costs to get the property out of a distressed state before obtaining permanent, conventional financing. The hard money loan is for $150,000. The important thing is, after applying the new, first-position lien for the hard money loan, I would still have about $250,000 of equity in the property.

So I just emailed the hard money lender two questions about the “loan charges” listed on the not-yet-finalized settlement statement that the Title company just sent out, and I’m a little concerned by the responses. Is there something I am not understanding about this?

(1) A new, previously undisclosed “contingency reserve” for $9000 or 12% of what was supposed to be the funds to me from this transaction. I asked for clarification and he said, “That’s the interest reserve.” Why would there be an interest reserve when the collateral is already $250K?  Mathematically, it seems to be six months of interest, but . . . someone is afraid that they are ONLY getting $250K from a default rather than $259K? I’ve lent money before and there was no “interest reserve” for me. The idea seems somewhat silly to me. “Prepaid interest” is a thing: that means my first six months are paid and I don’t have to worry about paying for six months. But with this they will surely foreclose on me if I don’t pay the first month or two. So . . . basically I’m just borrowing less money at a higher interest rate, right? This kind of thing only makes sense to me if the lender needs to collateralize the loan somehow; if the lender is already turning $150K into $400K why would they need to further collaterlize the loan? Are they really trying to protect themselves in case of default? Or are they trying to encourage default by reducing my funds?

(2) There was a previously undisclosed “draw holdback” of $60,000. I asked what this is, because I didn’t know, and he said, “I can remove the $60,000 holdback and release all of it to you.” Gee, thanks. The new $60,000 holdback and the new $9000 reserve are equal to more than 100% of what the funds to me would have been. So . . . you’re just trying to get me to default, right? I mean, after I asked about it he generously offered to let me have the money I was paying to borrow, but if I hadn’t said anything he’d be getting first position lien on the house while giving me literally nothing in return.

Am I missing something? Or is this as dodgy as it seems to me?