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» Down Payments - What Do They Pay For?
Hard money lenders such as Avatar Financial Group ask for a down payment toward the costs of due diligence at the time a borrower signs a Letter of Intent and Term Sheet. Where do these funds go?
Due dilignce is the process of determining the validity of the statements made by a borrower concerning the subject property, the borrower's finances, etc. In that process, lenders take a look at the financial information provided to determine the veracity of the information provided. They may ask for tax returns, signed P&Ls, and more. Lenders will value the subject property using past appraisals, tax values, business use valuations, and other means. The valuation will be based on the quick-sale value of the property. A site visit to the property by a represenatative from Avatar is part of Avatar's due diligence process. Finally, there are costs for legal and escrow work.
Avatar uses due diligence down payments for third party costs only. They do not keep these funds. Points, loan origination/processing fees, etc. may be part of the loan, but these funds are never collected upfront before the loan closes.
