What Equity or Down Payment Is Required for a Hard Money Loan?

Ask a first-time private lending borrower what worries them about a hard money loan, and most will say the rate. Then they get into a deal, and the real question surfaces: How much of my own money needs to be at closing, and where is it allowed to come from? Understanding hard money down-payment requirements starts with how private lenders size a deal.

That answer looks very different with us than it does at a bank, and in many cases, it works in the borrower’s favor. So, let’s walk through what equity and down-payment requirements actually look like, why loan-to-value (LTV) and loan-to-cost (LTC) are not the same thing, and a few ways experienced investors bring less cash to closing than you’d expect.

How Much Down Payment Do You Need for a Hard Money Loan?

Hard money down payments typically range from 20% to 35%, depending on the property and the deal. Socotra Capital lends up to 65% LTV, so borrowers usually bring 35% in equity, which can come from cash, equity in the property, or other real estate you own.

That last part is worth slowing down for a closer look. A bank underwrites you: your debt-to-income ratio, your tax returns, two years of W-2s, how many months of reserves you have in the bank. We underwrite the property. Our equity requirement exists to protect the collateral position, and it isn’t a judgment about your personal finances.

That’s why we can work with people banks routinely decline: self-employed borrowers, investors between projects, borrowers with complex financial situations (missing tax returns, no current income, low FICO scores, and so forth). If the equity is there and your exit strategy holds up, we can usually get a deal done through one of our hard money loan types.

It also means your equity doesn’t have to be cash. If you own another property, you can pledge that equity instead of writing a check. For example, if you have limited cash but own other real estate free and clear, we can often finance 100% of the purchase price by placing a lien on that additional property, even across state lines, as long as the total loan stays within 65% of the combined value. We see borrowers do this constantly, and it’s often what makes a deal possible at all.

What’s the Difference Between LTV and LTC?

LTV compares your loan to what the property is worth. LTC compares it to what you’re actually spending, including the purchase price and any rehab budget. The same loan can look very different under each, so it matters which one your lender uses.

Loan-to-Value (LTV) refers to the loan amount as a percentage of what the property is worth. That’s either the current as-is appraised value or, on some project loans, the value after repairs. A $650,000 loan against a property appraised at $1,000,000 is a 65% LTV loan.

Loan-to-Cost (LTC) refers to the loan amount as a percentage of what the project actually costs you, meaning purchase price plus your rehab budget. Buy at $700,000, budget $150,000 in renovation, and your total cost is $850,000. That same $650,000 loan is now roughly 76% LTC.

Same loan. Two very different-looking numbers. The gap gets widest on value-add deals, where a property bought well under market can show a comfortable LTV while still eating up a big share of what the borrower spent to get there. Before you build a capital plan around a lender’s stated maximum, ask which of the two it’s measured against.

Here’s our answer: We size loans on LTV, using the property’s appraised value rather than what you paid for it. That’s why buying below market works in your favor with us. On rehab projects, we also look at your total project cost.

Down Payment Comparison: Hard Money vs. Conventional Loans

Conventional and SBA programs advertise lower down payments. True enough, but the comparison falls apart once you look at what each lender will accept as equity and how long they take to say yes.

Sources:

¹ Socotra Capital, Turbo Close®

² Avana Capital, Commercial Real Estate Loan Down Payment Requirements

³ Axiant Partners, How Long Does It Take to Close on a Commercial Real Estate Loan?

⁴ U.S. Small Business Administration, 504 Loans; SOP 50 10 (10% standard, 15%–20% for newer businesses or special-purpose property)

Pay attention to that third column. A bank asking for 20% down that will only count verified personal cash can be much harder to satisfy than a private lender asking for more equity but willing to take a lien on a property you already own. Conventional deals don’t usually die over the down payment percentage, they die because the borrower can’t produce funds in a form the lender will accept.

Down payment is only one side of the comparison. For a breakdown of commercial hard money rates and terms, including points, fees, and closing timelines, see our full guide.

4 Ways Borrowers Meet the Equity Requirement

What we’re really looking for is skin in the game. Cash is the cleanest way to show it and the one we’d always rather see, but it isn’t the only one. There are four sources we’ll consider, and most deals end up using some combination of them:

1. Cash. The straightforward option and our preference on every deal. Cash requires no valuation work, no additional liens, and no negotiation with a third party, which means it’s also the fastest path to closing.
2. Existing Equity in the Property You’re Buying. If you’re purchasing well below market value, that equity can carry some or all of the requirement on its own. This is more common than borrowers expect. A strong acquisition price often gets a deal to 65% LTV without anything else needed, because we’re sizing the loan against what the property is worth rather than what you paid for it.
3. Cross-Collateral from Another Property. When the target property alone doesn’t get us there, you can pledge equity in real estate you already own to make up the difference. We take an additional lien on that second property and count its equity toward your position in the deal. For borrowers who are asset-rich but don’t want to liquidate anything to free up cash, this is usually the answer.
4. Seller Seconds. The seller carries a subordinated note for part of the purchase price. We do allow this, but with conditions: we’ll typically still want cash from you alongside it, and we’ll usually lower the loan amount to offset the added risk of a junior lien sitting behind us. Bring it up early because the terms and the subordination have to be approved before we can size the loan.

Not sure which of these fits your deal? The Borrower’s Guide: Process, Preparedness, and Timeline covers how our process works, how to prepare, and what to expect on timing.

Which One Applies to Your Deal?

If you’re buying at a real discount, the property may already be doing the work, and you may need less from other sources than you’d assume. If you own appreciated real estate and want to keep your cash deployed elsewhere, cross-collateral is the conversation to start. And if you’re looking at a seller second, raise it before the purchase agreement is signed. It changes how we size the loan, and that’s a much easier discussion to have up front than in the middle of underwriting.

Planning Your Equity Position Before You Apply

The borrowers who close fastest are the ones who show up with the capital plan already worked out. They know which property value the lender will use, which metric limits the loan, and where their equity will come from. That prep work is often the difference between a four-week close and a one-week close.

If you’re in the middle of a deal and want a straight answer on what your equity position needs to look like, we underwrite in-house and can usually tell you quickly. To get your deal ready, start with The Borrower’s Guide: Process, Preparedness, and Timeline.