This is a question that we hear all too often at HBC Lending. This really is a “loaded” question, however, for the most part SBA will allow as low as 15%. In reality, SBA 7(a) loans are primarily based upon Loan-To-Value (“LTV”) and are not based upon the percentage of down payment. Many potential clients come to us with the expectation of a 20% down payment. However, it really is more complicated then that. Also, it can be less than this and it really just depends on how the loan is structured. The key to understanding your down payment requirement is to understand two key things. First, a buyer should understand what Loan-To-Value (“LTV”) means. The formula for LTV is the total loan amount divided by the value of the property (Total Loan / Value of the property). For a purchase the value of the property is always assumed to be the purchase price. Most banks in the industry will only do a maximum loan amount of 80% LTV or in other words a loan no greater than 80% of the purchase price (We at HBC however work with banks that will do loans up to 85% of the purchase price or in other words 85% LTV). Second, a buyer should understand what “Total Financing Package” means. The Total Financing Package is all bank related costs associated with buying a property and they are comprised of the following: Total purchase price, PIP costs, bank closing fees and title and escrow costs. Therefore the “Total Financing Package” will always be greater than the purchase price as the Total Financing Package includes all the costs associated with buying the property. The banks will never finance 80% of the Total Financing Package. If they did then a statement that only 20% down is required would be accurate but it is not.

For example, if a bank will only do a loan of 80% LTV or in other words a loan no greater than 80% of the purchase price then in reality what that means for the buyer is their down payment will be 20% of the purchase price + PIP costs + closing costs + title and escrow. As you can see this far exceeds 20% of the Total Financing Package. If the lender will do a maximum loan that is 85% of the purchase price then the buyer will be responsible for putting down 15% of the purchase price + PIP costs + closing costs + title and escrow. The 85% LTV lenders are all that we work with at HBC. Generally speaking if the PIP costs are not excessive then the buyer’s overall down payment (The overall down payment includes all bank costs such as PIP costs + bank closing costs + title and escrow) can be somewhere around 18%-20% of the purchase price of the property with us because of our great banking relationships. This is a huge difference compared to our competitors whose banks will only finance 80% of the purchase price. If the bank is only doing a loan for 80% LTV then the buyer’s actual overall down payment is around 25% of the purchase price. This 5%-7% savings that our buyer’s save may not sound like much, however, if you are looking at properties around $3,000,000 or more then that is nearly $210,000 or more in less down payment monies with our banks compared to our competitors!

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