Hard-money-loan

Quick Definition — What Is a Hard‑Money Loan?

Plain‑English definition

A hard‑money loan (also called a hard money loan or private money loan) is a short‑term, asset‑based real estate loan secured primarily by the property’s value rather than the borrower’s credit history.

How hard‑money differs from a conventional mortgage and home‑equity loan

Conventional mortgages and HELOCs are credit‑based: lenders focus on income, credit score and DTI; hard‑money lenders underwrite the deal based on collateral and expected After‑Repair Value (ARV), making decisions faster but charging higher rates and shorter terms.

Who Uses Hard‑Money Loans and Why?

First‑time and fix‑and‑flip investors (speed, rehab financing)

Flippers use hard‑money for fast closings and draw schedules that fund rehab work when traditional banks won’t finance distressed properties.

Homeowners with urgent needs (foreclosure, auction purchases)

Homeowners facing foreclosure or people buying at auction use hard‑money to close quickly when conventional financing would take too long.

Borrowers with unconventional income or poor credit

Self‑employed borrowers, seasonal workers, or those with recent credit events can qualify because underwriting focuses on property value not tax returns.

Professionals who advise clients (agents, brokers, contractors, lenders)

Real estate agents, brokers and contractors recommend hard‑money when time, rehab scope or borrower profile make traditional loans impractical.

Typical Terms & Costs (with numeric examples)

Interest rates — typical ranges and what affects the rate (example numbers)

Typical rates: 8%–15% for residential fix‑and‑flip loans; specialty or higher‑risk loans can be 15%–20%+. Factors: LTV, borrower experience, local market, rehab complexity and lender size.

Points and origination fees — what a “point” means and sample math

A point = 1% of loan amount. Example: $200,000 loan with 2 points = $4,000 origination fee charged at closing. Lenders commonly charge 1–4 points.

Loan‑to‑Value (LTV) and how lenders calculate it (purchase LTV vs. ARV)

Purchase LTV uses current purchase price or current value; rehab LTV uses ARV. Typical limits: 60%–75% of ARV for total project financing. Example: ARV $300,000, lender funds 70% = $210,000 max.

Loan length, balloon payments, and common prepayment terms

Terms: 6–36 months common. Many loans are interest‑only with a balloon payoff. Prepayment penalties vary—some lenders allow free prepay after an initial period; others charge 1–3% if paid early.

Additional fees — draws, inspection fees, servicing fees (sample totals)

Typical extras: draw fees ($100–$500 per draw), inspection fees ($150–$300), servicing fees (0.25%–1% monthly). Example totals on $150,000 loan for 6 months: interest at 12% = $9,000; 2 pts = $3,000; inspections/draws = $1,000; total financing cost ≈ $13,000 (excluding rehab).

How Hard‑Money Lenders Underwrite Loans

Asset‑based underwriting: focus on collateral and After‑Repair Value (ARV)

Underwriting centers on current property condition, comparable sales for ARV, and whether ARV supports the loan amount after reserves for unexpected costs.

Typical documentation required (deal package checklist)

• Purchase contract
• Scope of work / rehab budget and timeline
• Comps to support ARV
• Proof of down payment funds
• Contractor bids or demo photos
• Borrower ID and basic financials (bank statements)

What lenders want to see in your rehab plan and exit strategy

Clear line‑item budget, realistic timeline, contractor credentials, contingency reserve (typically 10%–20% of rehab), and a credible exit: sale price estimate or refinance plan.

Common Uses & Real‑World Scenarios

Fix‑and‑flip example — short timeline and funding needs

Flippers use hard‑money to buy below market, renovate, and sell within months—funds cover purchase and staged rehab draws tied to inspections.

Bridge financing for quick closings or chain‑breakers

Use a bridge loan when you must close fast to beat competing offers or bridge a timing gap while a long‑term loan is arranged.

Auction or REO purchases — speed and certainty advantages

Auction buys demand nontraditional funding because title issues or quick close windows exclude bank loans; hard‑money lenders often close in days.

Construction and renovation draws (how draw schedules work)

Funds are released in draws tied to completion milestones (foundation, framing, drywall, final). Lenders inspect or require third‑party inspectors before releasing each draw.

Real World Application

Fictional scenario: 90‑day flip (full narrative with numbers: purchase price, rehab budget, loan terms, exit plan)

Scenario: Investor buys distressed house at $180,000. Estimated rehab $40,000. Expected ARV after rehab $300,000.

• Loan structure: hard‑money purchase+rehab loan, funds up to 70% of ARV = max loan $210,000.
• Actual loan: borrower requests $200,000 (purchase + rehabs), lender approves at 65% LTV on ARV ($195,000) so borrower contributes $25,000 cash.
• Costs: rate 12% annual (interest paid monthly), 2 points origination = $4,000, draw/inspection fees = $600, underwriting/closing ~ $1,200.
• 90‑day carrying interest (quarter of 12%): interest = $200,000 * 0.12 * 0.25 = $6,000.
• Total financing cost ≈ $6,000 (interest) + $4,000 (points) + $1,800 (fees) = $11,800.
• Sale: property sells for $300,000. Payoff: loan principal $195,000 + financing costs $11,800 = $206,800. Net before closing/sales costs: $300,000 - $206,800 = $93,200. Less selling costs (6% realtor + closing ≈ $18,000) = $75,200. Subtract total cash in (down payment + rehab gap + contingencies) to find profit.

Decision checklist for this scenario (when to choose hard‑money vs. other options)

• Is the closing time critical? Yes → hard‑money favored.
• Is ARV supported by comps? Yes → proceed.
• Do you have a clear contractor/timeline and 10–20% contingency? Yes → proceed.
• Can you refinance or sell within loan term? Yes → hard‑money is reasonable.

What can go wrong in the scenario and mitigation steps (contingencies)

• Contractor delays → build 2–4 week buffer and hold retainage.
• Market softens → run ARV sensitivity; keep contingency or plan refinance.
• Cost overruns → reserve 10–20% contingency; request contingency holdback in loan.
• Title or inspection surprises → do early due diligence and order title/inspections pre‑offer where possible.

Pros and Cons — Risks and Benefits

Advantages: speed, flexible underwriting, ability to fund distressed deals

• Fast approvals & closings (days to weeks)
• Credit flexibility for unconventional borrowers
• Can finance properties banks won’t touch

Disadvantages: higher cost, short terms, reliance on exit plan

• High interest and fees increase carrying cost
• Short terms create balloon/refinance risk
• Project failure can lead to foreclosure

Risk checklist for borrowers (balloon risk, contractor delays, market risk)

• Confirm exit strategy and contingency liquidity
• Vet contractors and maintain a buffer for delays
• Stress‑test ARV and resale timeline

Exit Strategies — How Borrowers Repay a Hard‑Money Loan

Refinance to conventional mortgage (requirements and timeline)

Refinance requires clean title, completed rehab, property appraised at a level banks will lend on, and borrower qualifying under standard credit/income rules—expect 30–60 days for underwriting.

Sale of property — timing and sale‑cost considerations

Sale pays off the loan; include selling costs (agent fees, concessions), and account for possible time on market when calculating profit and paying interest.

Payoff via other private funding or portfolio cash (when that makes sense)

Borrowers may pay off with funds from investors, partner capital, or a new private loan if refinancing or sale aren’t immediately available; this preserves ownership but can be more expensive.

Alternatives to Hard‑Money Loans (when to consider cheaper/safer options)

Conventional mortgages and HELOCs — pros/cons and eligibility

Pros: lower rates, longer terms. Cons: slower approvals, stricter underwriting and eligibility requirements—use when property is owner‑occupied or good condition and you qualify.

Bridge loans from banks or credit unions

Bank bridge loans can be cheaper than private hard‑money but require stronger borrower profiles and more documentation and may take longer to fund.

Seller financing, private individual lenders, or joint ventures

Seller financing can be flexible and cheap; private individuals or JV partners may offer tailored deals—good if you have local relationships or can share profits.

Strategy comparison table (cost, speed, qualification)

Option	Typical Cost	Speed	Qualification
Hard‑money	High (8–20% + points)	Very fast	Asset‑based
Bank bridge	Moderate	Moderate	Stronger borrower reqs
Conventional/HELOC	Low	Slow	Strict
Seller/Private JV	Varies (often lower)	Fast–moderate	Relationship based

How to Find and Vet a Reputable Hard‑Money Lender

Sources to find lenders (local vs. national, networks, brokers)

Search local investor meetups, real estate investor associations, online lender directories, mortgage brokers and referrals from agents or contractors. National players can be faster but local lenders may know your market better.

Red flags and predatory practices to avoid

• Unclear fee disclosures or balloon surprises
• Promises of guaranteed results or appraisal manipulation
• Pressure to sign quickly without reviewing loan docs
• Lenders who refuse to put terms in writing

Questions to ask lenders (rate, points, LTV, draws, default remedies)

• What is the interest rate and how is it charged?
• How many points and what other fees exist?
• What LTV do you use (purchase vs. ARV) and what reserves are required?
• How are draws handled and how fast are they paid?
• What remedies or fees apply in default?

Sample vetting checklist and reference checks

• Request 3 recent deals or references
• Verify licensing and complaints with state regulator
• Compare term sheets from 2–3 lenders
• Read the loan agreement line‑by‑line and consult an attorney if unclear

Step‑by‑Step Application & Funding Timeline

Preparing your deal package (documents and spreadsheets to have ready)

• Fully executed purchase contract
• Rehab budget and draw schedule spreadsheet
• Comps supporting ARV
• Proof of funds for down payment
• Contractor bids, license and insurance
• Borrower ID and recent bank statements

Typical underwriting timeline — offer to funding (ideal vs. realistic)

Ideal: 3–7 days for approval and 7–14 days to close. Realistic: 7–21 days depending on title, inspections and state or lender processes.

What to expect at closing and common contingencies

Expect title work, payoff statements, closing costs and possibly an escrow account for draws. Contingencies: clear title, proof of contractor insurance, and final appraisal/inspection for draws.

Taxes, Credit Impact, and Legal Considerations

Potential tax implications for investors and homeowners

Interest and some fees may be deductible for investment properties; rehab costs generally capitalize into basis. Consult a tax advisor for itemized treatment and 1031 considerations.

How hard‑money affects personal/business credit

Hard‑money loans may or may not report to credit bureaus; late payments and defaults can impact credit if reported. Business entity borrowing may isolate personal credit but lenders often require personal guarantees.

Regulatory and licensing issues (state variations, usury laws, consumer protections)

State licensing and usury caps vary; consumer loans for homeowner occupants often have additional protections. Verify lender licensing and consult local counsel for compliance concerns.

Quick Decision Checklist — Is a Hard‑Money Loan Right for Your Deal?

Short yes/no checklist (deal size, timeline, exit confidence, rehab risk)

• Do you need to close in under 30 days? Yes/No
• Is ARV supported by strong comps? Yes/No
• Do you have contractor quotes and contingency funds? Yes/No
• Can you sell or refinance within 6–12 months? Yes/No
• Is your profit margin large enough to absorb higher financing costs? Yes/No

Example decision outcomes (choose hard‑money, delay, or seek alternatives)

All “Yes” → Hard‑money likely appropriate. Mixed answers → Get multiple lender quotes or delay until funding/plan stronger. Many “No” → Seek conventional or JV alternatives.

Frequently Asked Questions (FAQ)

Can I get a hard‑money loan with bad credit?

Yes — lenders focus on property value and exit plan; many accept borrowers with low credit scores if collateral and ARV are strong.

How fast can I close with a hard‑money lender?

Often in 3–14 days for experienced lenders and clean title; more complex deals take longer.

What is the maximum LTV for purchase vs. rehab?

Purchase LTVs may be 60%–75% of ARV; some lenders split funding between purchase and rehab (e.g., 65% of ARV for total project). Exact LTV depends on lender and market.

Will the lender finance the full rehab budget?

Many lenders fund a portion of rehab via draws and require borrower equity or contingency reserves; full funding is less common unless borrower has track record.

Are there prepayment penalties or balloon payments?

Most hard‑money loans have balloon payoffs at term end; prepayment penalties vary—ask the lender and get terms in writing.

Conclusion — Key Takeaways and Next Steps

Short summary of when hard‑money makes sense

Hard‑money is appropriate for time‑sensitive purchases, distressed properties, and borrowers who need asset‑based underwriting; it’s costly but flexible for short‑term, high‑return projects.

Immediate action items (create a deal package, talk to 2–3 lenders, run ARV sensitivity)

• Assemble purchase contract, rehab budget and comps
• Request term sheets from 2–3 reputable lenders
• Run best/worst ARV scenarios and contingency math

Suggested further reading/resources (calculators, rehab budgeting templates, local lender directories)

Use rehab budget templates, ARV calculators and local investor networks; prepare spreadsheets for draws, contingency and profit analysis before approaching lenders.

Sample Calculations Appendix

Example amortization/balloon payoff for a 6‑month hard‑money loan

$150,000 loan, 12% annual interest, interest‑only monthly payments: monthly interest ≈ $1,500. Total interest over 6 months = $9,000. Principal due at balloon = $150,000.

Example points and fee breakdown for a $100,000 loan

• 2 points = $2,000
• Interest at 12% for 6 months = $6,000
• Draw/inspection fees = $500
• Total financing cost ≈ $8,500 (excludes escrow/title and closing costs)

Template: Minimal Deal Package Checklist for Lenders

One‑page checklist users can copy

• Signed purchase contract (with contingency dates)
• Rehab scope & line‑item budget (with contingency)
• Comps supporting ARV (3–6 comparables)
• Contractor bids and estimated schedule
• Proof of funds for down payment
• Borrower ID and recent bank statements (last 2 months)
• Title commitment or information for lender
• Exit strategy summary (sale price estimate or refinance plan)