Definition — What "Hard-money loans" mean in real estate
A hard-money loan is a short-term, high-interest real estate loan secured primarily by the value of a physical property rather than the borrower’s creditworthiness. These loans are typically made by private investors or specialty lenders instead of banks and are used when speed, flexibility, or the property’s condition makes conventional financing impractical.
Key characteristics
- Collateral-based approval: Decisions are based on the property’s value (often measured as loan-to-value or LTV), not mainly the borrower’s credit score or income. Typical LTVs range from about 60%–75%.
- Short terms: Most hard-money loans run 6–36 months with many structured as interest-only monthly payments and a balloon payment at maturity.
- Higher interest rates: Rates commonly fall between roughly 9%–15%, reflecting faster underwriting and increased lender risk.
- Fast funding: Underwriting and funding can be completed in days or weeks, far quicker than a conventional mortgage.
- Down payment / cash required: Borrowers often must bring cash to closing to cover the difference between the loan and purchase/rehab costs plus lender fees.
Typical loan terms & costs
- Term length: usually 6–36 months.
- Interest rates: commonly 9%–15% (examples show 10%–13% for many fix-and-flip lenders).
- Lender fees: often 2%–5% of the loan amount.
- Closing costs: can include fixed fees (e.g., ~$999) plus title and recording fees.
- LTV or ARV-based lending: many lenders use purchase price or After-Repair Value (ARV) to set maximum loan amounts.
Common uses
- Fix-and-flip projects and rehabs where speed matters.
- Purchases of distressed or non-conforming properties that banks won’t finance.
- Short-term bridge financing until a property is sold or a long-term mortgage is put in place.
- Investments where the borrower needs rapid close or flexible draw schedules for renovation.
Real-world examples
- Fix-and-flip (California): Investor buys a distressed home for $500,000, plans $100,000 rehab. Lender provides a 12‑month loan at 12% covering 65% of purchase ($325,000). After a six-month rehab the investor sells for $800,000, repays the loan plus interest and keeps the profit.
- Rehab budget example: Six-month rehab estimated at $26,650. Lender finances 70% of a $330,000 ARV (loan = $231,000). Investor supplies the remainder (~$29,290) to closing, with a draw schedule covering rehab draws and operating expenses.
- Typical hard-money product: Some lenders offer 12‑month fix-and-flip loans (extensions available), rates 10%–13%, lender fees 2%–5%, and minimum credit score requirements (e.g., 650) or preference for experienced investors.
Who should (and shouldn’t) use hard-money loans
Good fit: real estate investors and experienced flippers who need fast closings, flexible rehab draw schedules, or financing for properties that don’t qualify for bank loans. Not a good fit: most primary-home buyers or anyone seeking long-term, low-cost financing because of the high rates, fees, and short terms.
Risks to watch
- High cost: Interest and fees can significantly reduce profit margins on projects.
- Short timeline pressure: Project delays increase carrying costs and risk of default.
- Foreclosure risk: Because loans are property-secured, failure to repay can quickly lead to foreclosure.
- Variable lender standards: Terms and transparency vary; inexperienced borrowers can face expensive traps.
How to qualify / what lenders review
- Primary focus on the property’s value (purchase price, ARV) and exit strategy (sale or refinance).
- Proof of funds for down payment and rehab budget, plus a clear work plan and timeline.
- Some lenders require minimum credit scores or prefer borrowers with prior experience.
- Appraisals or broker price opinions and contractor bids are commonly required for underwriting.
Alternatives to consider
- Conventional rehab mortgages (FHA 203(k), Fannie Mae HomeStyle) for buyers who qualify and can wait for underwriting.
- Bridge loans or short-term construction loans from banks for certain projects.
- Private partner capital or seller financing when available.
Quick checklist before taking a hard-money loan
- Confirm total cost: interest, fees, closing costs, and carry for the estimated project timeline.
- Validate ARV and resale assumptions with comps or an independent opinion.
- Have a clear exit plan (sale, refinance to a conventional mortgage) and contingency budget for delays.
- Compare multiple lenders for rates, fees, transparency, and draw schedules.
Short FAQs
Can I use a hard-money loan for a primary residence? Generally no—these loans are tailored to investors and short-term projects, not long-term owner-occupied mortgages.
Can I refinance a hard-money loan into a conventional mortgage? Yes—many investors use hard-money loans as bridge financing and refinance to a conventional loan or sell the property before the hard loan matures.
How fast can I get funding? Often in days to a few weeks, depending on appraisal and paperwork—much faster than bank loans.
Bottom line
Hard-money loans are a powerful tool for investors who need rapid, collateral-driven financing for short-term projects. They trade higher cost for speed and flexibility. Use them when the business case (projected profit, clear exit strategy, and contingency funds) comfortably absorbs higher interest and fees.
