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Hard Money Loans: A Complete Guide

Timothy Moore • December 8, 2023

Hard money loans are a way to quickly borrow a large amount of cash for an investment, like property, without the hassle of a complex underwriting process. However, these loans carry significant risks, and you can’t get them through traditional lenders.

So what exactly are hard money loans, how do they work, and who are they for?

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What are hard money loans?

Hard money loans refer to short-term financing where the value of an asset – usually the real estate being purchased with the loan – serves as collateral for the loan. These loans come from private investors and companies, not traditional banks.

Hard money loans have looser credit score requirements and are easier to get if you don’t have a solid credit history. Because there’s no lengthy underwriting process, you can usually get the money in a matter of days.

However, interest rates for hard money loans are significantly higher than those for a traditional mortgage, and you usually only have a few years to repay the loan.

How do hard money loans work?

Private investors or companies offer hard money loans to applicants based on the asset’s value (usually property) being financed. That asset serves as collateral on the loan; if the borrower defaults, the lender can take possession of the asset to cover their losses. Credit scores and income are less important for getting approved because the loan is based on the asset’s value and not the borrower’s finances.

Hard money loans are not as tightly regulated as conventional mortgages and pose a greater risk to the lender. For that reason, hard money loans come with higher interest rates and shorter repayment terms.

In many cases, lenders may require a larger down payment than you’d need to come up with for a conventional mortgage. That means borrowers may need substantial cash in their savings account to get a loan.

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When to use a hard money loan

Hard money loans are usually a last resort for borrowers, but there are a few instances when they might make more sense. Below are three common hard money loan examples:

You’re a house flipper

If you flip houses professionally, you may already have cash on hand to purchase your next property. But if your money’s tied up in other properties, you can get a hard money loan much faster and more efficiently than you could a traditional mortgage.

And because the goal is to renovate and sell the house quickly, the high interest rate and the short repayment term of a hard money loan are less of a concern.

You’re expanding your small business

If you’re a small business owner and your company is growing fast enough that you need more commercial property, you can consider a hard money loan, especially if you can’t qualify for a traditional commercial real estate loan.

You’re buying an investment property

Real estate investors and developers often turn to hard money loans to purchase desirable property when they can’t get traditional financing, either because they don’t have the best credit history or the property costs more than they can secure money for through a conventional mortgage.

Hard money loans: pros and cons

Hard money loans have some obvious advantages, but there are some flaws to consider.

Pros

  • Fast funding: You can get your loan approved and funded in a matter of days.
  • Easier requirements: Borrowers without good or excellent credit can still qualify since these loans are based on the property value, not your creditworthiness.
  • Made for investing: Hard money loans are a way to invest, even if you don’t have the startup funds to do so or your money’s currently tied up in another investment.

Cons

  • High interest rates: Because of the risk involved to the lender, hard money loans have higher interest rates than traditional mortgage rates.
  • Short repayment terms: While most homeowners can repay their mortgages over 15 or 30 years, hard money loans are much shorter – typically between six months and three years.1
  • Non-traditional lenders: To get a hard money loan, you’ll have to look beyond traditional banks and credit unions. Instead, you’ll work with private lenders, which are less regulated.

How to get a hard money loan

Think a hard money loan is the right move? Here are the steps you’ll need to take to get financing:

1. Research hard money lenders

Traditional banks and credit unions don’t offer hard money loans, so you’ll have to look elsewhere for financing. Ask your real estate agent, local small business owners, and property investors in your professional network for recommendations, or do a simple search online.

Gather information on repayment terms, rates, and down payments so you can compare options and choose the right loan for you.

2. Submit a loan application

Each lender will have its own loan application process, but it’s generally much less involved than a typical mortgage application. Lenders may still run a credit check, but they will likely be much more lenient about your score.

The entire underwriting process might take anywhere from a few days to a couple of weeks.1

3. Identify collateral

As part of your application, you’ll need to identify your collateral for the loan. This one’s easy: It’s the property or asset you hope to finance with the loan!

The lender will likely require an appraisal to ensure the property is worth the amount they’re financing.

4. Make a down payment

Hard money lenders don’t have a set playbook for establishing down payments, so how much you have to put down will vary from lender to lender. Much like buying a house through a conventional mortgage, however, you’ll probably have to come up with some of the money on your own.

While it’s possible to get a conventional mortgage with as little as 3% down, most hard money lenders require down payments between 20% and 35%.2,3

Why the large down payment? Hard money lenders typically don’t want to lend you the full value of the asset being financed. By only lending you 65% to 80%, the lender stands to make a profit even if you default.

5. Sign the loan agreement

If you’re approved and can come up with the down payment, the lender will draft a loan agreement for you to sign. Hire an attorney to review the contract if you need help with the legal language in the agreement.

Don’t forget: Just like a traditional mortgage, a hard money loan will likely have closing costs. And, as the borrower, you’re the one paying for those.

Once you’ve signed, the lender will transfer you the funds.

6. Stay on track with repayment

Remember, the property or other asset you’ve financed with your hard money loan serves as collateral on the loan. If you stop paying the loan, the lender can seize the asset.

Review your payment schedule, and make sure it aligns with your anticipated profit timeline, whether you’re flipping a house, renting out a property, or expanding your business with new commercial real estate.

Hard money loan alternatives

Hard money loans offer fast funding and are easy to get, but the short repayment window and the high interest rates make them less desirable to most borrowers. Here are some alternatives to consider instead:

  • Personal loan: If you need money to fund renovations in a rental or investment property, you might get a better deal with a personal loan. Some personal loan lenders let you borrow up to $100,000 and have repayment terms for as long as seven years (and sometimes more). Just be careful: Interest rates can go as high as 36% (and sometimes even higher).4
  • HELOC: A home equity line of credit (or HELOC) is a helpful option for funding renovations to your permanent residence. It’s smart to consider this line of credit – or a home equity loan – for personal property before looking into a hard money loan.
  • Private loan: If you have friends, family, colleagues, or neighbors interested in formalizing a loan, work out a private money lending contract with them that includes an interest rate and repayment period. Make sure both parties are comfortable with the terms, and consider potential issues with lending money to family.
  • Cash-out refinance: If you already own a home and have built considerable equity in it, you can also use a cash-out refinance to fund the purchase or renovations of an investment property, whether you’re hoping to rent it out or flip it. A cash-out refinance lets you replace your current mortgage with a new one, borrowing more than you actually still owe on the house. You’ll pocket the difference in cash, and then you’ll start repaying this new, higher mortgage each month.
  • HomeStyle® loan: Fannie Mae offers HomeStyle® Renovation mortgage loans that make it easier to update your personal residence or investment property without needing to take out a high-interest personal or hard money loan.5

Hard money, hard terms

Hard money loans can seem super convenient when you need cash fast for an investment and don’t have the best credit. However, the steep interest rates and short repayment terms make it easy to rack up high-interest debt or default on the loan.

Before taking out a hard money loan, make sure you have a plan to repay it in full and on time. If you’re not confident you can handle the interest or repay the loan quickly, seek other options.

Hard money loans have downsides, but they’re often better than payday loans. Consider these payday loan alternatives when you need to borrow money.

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1 Information from Experian's "How Do Hard Money Loans Work?" as of November 22, 2023: https://www.experian.com/blogs/ask-experian/how-do-hard-money-loans-work/

2 Information from Rocket Mortgage's "What Is a Conventional Loan?" as of November 22, 2023: https://www.rocketmortgage.com/learn/conventional-mortgage

3 Information from SoFi's "What Is a Hard Money Loan?" as of November 22, 2023: https://www.sofi.com/learn/content/hard-money-loans/

4 Information from Experian's "What's a Good Rate on a Personal Loan?" as of November 22, 2023: https://www.experian.com/blogs/ask-experian/whats-a-good-interest-rate-for-a-personal-loan/

5 Information from Fannie Mae as of November 22, 2023: https://singlefamily.fanniemae.com/originating-underwriting/mortgage-products/homestyle-renovation

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