If you have just enough for down payment, you don't have enough

[Nghi Le]

I see a lot of people asking, "How much down payment does a hard money lender require?" My quick answer is 10-25%, primarily dependent on the lender, but can also depend on experience, credit, etc.  But I honestly think that answer isn't good enough.

Most people asking about down payment are usually constrained on liquidity (available cash). Please realize that flipping (or even BRRRR) is a cash-intensive business. If you have just enough money to do a flip, you don't have enough money. Most flippers, whether you've done 0 flips or 50 flips, often go over budget and over time; it's just the nature of the game. There are too many things out of your control (I can give you plenty of stories, such as a $175k rehab turning into $550k), and sometimes only way to survive and get through it is to have enough cash in your pocket.

I know that when I say down payment ranges from 10-25%, most people will gravitate towards the lower end of that.  Even with a 10% down payment, you need more money than just that 10% to qualify for the loan. This is because:

1. Down payment is not the same as cash to close. Cash to close includes down payment, all the lender's fees/points up front, prepaid interest until the end of the month, prepaid insurance (a vacant policy is at least 3x the cost of a homeowner's policy) depending on the lender's policy (i.e. prepaid for a few months, 6 months, 1 yr, etc), closing costs, and maybe some other miscellaneous costs on the HUD (e.g. if you're buying from a wholesaler and they wrote up the contract so that buyer pays all closing costs).
2. Reserves for monthly payments.  Lenders want to make sure you have enough money to service the debt during the loan. So they usually want to see enough money for at least 4-6 months of interest, sometimes for the entire duration of the loan (e.g. 1-yr).
3. Initial rehab funds + contingencies. If you are borrowing rehab funds, 95% of the time it's in the form of reimbursement draws. Which means you need to spend money first on the project, and then the lender will reimburse you as the project gets going. If the contractor asks you for a 50% deposit (which you should argue against), that's entirely on you; your lender will not front that money.