Hard money loans

Hard money loans in real estate are short-term, asset‑based loans secured by property. Unlike conventional mortgages from banks that emphasize a borrower’s credit profile and income, hard money lenders underwrite primarily on the value of the real estate collateral. These loans are designed for speed and flexibility when time or borrower credit makes traditional financing impractical.

Key features

• Short term: Typical terms run from 6 to 36 months.
• Higher interest rates: Often in the 9%–15% range (varies by lender and deal risk).
• Fast approval and funding: Decisions and funding can occur in days, not weeks.
• Collateral-based underwriting: Loan size is tied to the property’s value—commonly 60%–75% of the after‑repair value (ARV).
• Large down payment / equity requirement: Borrowers usually put up 20%–30% (or more) of the purchase or ARV as their equity.

Who uses hard money loans?

Common users include:

• Real estate investors executing fix‑and‑flip projects.
• Developers needing quick acquisition or rehab capital.
• Borrowers who can’t access conventional financing due to credit, documentation, or timing constraints.

How hard money loans work (step‑by‑step)

1. Property valuation: Lender assesses current value and projected after‑repair value (ARV).
2. Loan approval: Decision driven by collateral value and exit plan rather than borrower FICO.
3. Down payment/equity: Borrower provides required equity (often 20%–30%).
4. Quick funding: Closing and funding often happen within days.
5. Repayment: Interest‑only monthly payments are common, with a balloon principal due at term end or refinancing/sale as the exit strategy.

Real‑world examples

Example 1 — Fix‑and‑flip

An investor buys a distressed L.A. property for $500,000 and plans $100,000 in renovations to reach an estimated ARV of $800,000. A lender offers a 12‑month loan at 65% of purchase price, providing $325,000 while the borrower contributes $175,000 down. With a 12% interest rate and a successful flip that sells at $800,000, the investor repays the loan and realizes a profit after costs. Key points: one loan can cover purchase and rehab, funding is fast, but carrying costs and fees can materially reduce net profit.

Example 2 — Time‑sensitive purchase

An investor seeks a $100,000 fixer‑upper with $30,000 rehab and projects a resale at $180,000. A lender will lend 70% of the ARV (70% of $180,000 = $126,000). The borrower puts up minimal down payment (~$4,000), pays origination points and fees, and pays interest‑only monthly payments (e.g., $1,260/month at 12%). If the property sells in three months for the projected price, the investor nets an estimated $25,000 profit before other transaction costs.

Example 3 — Commercial bridge

A commercial investor needs $700,000 to close on a $1,000,000 property. A 12‑month hard money loan at 70% LTV supplies the $700,000 while the investor covers the $300,000 equity. With a 10% interest rate and a plan to refinance into conventional long‑term debt after improvements, the loan provides quick capital to secure the deal and complete upgrades.

Pros and cons

Pros

• Speed—fast approvals and funding for time‑sensitive deals.
• Flexible underwriting—less emphasis on credit and income documentation.
• Negotiable terms—private lenders can often accommodate unusual situations.
• Asset focus—lending is centered on the property’s value and exit strategy.

Cons

• Higher cost—interest rates and fees exceed conventional loans.
• Short terms—requires a clear, timely exit (sale or refinance).
• Large equity requirement—meaning higher upfront cash outlay or seller carryback.
• Balloon risk—the principal typically comes due at term end if not refinanced or sold.

When to consider a hard money loan

Use hard money loans when speed, flexibility, or a property‑centric underwriting approach outweighs higher financing costs—for example, competitive auctions, off‑market acquisitions, quick flips, or when conventional financing is unavailable. They are best used by borrowers with a concrete exit plan (sale or refinance) and a clear understanding of fees, holding costs, and timeline.

Bottom line

Hard money loans are a practical real estate financing tool for investors who need rapid, collateral‑based capital. They provide liquidity and flexibility at a premium price and are most effective when paired with disciplined rehab budgets, realistic ARV estimates, and a reliable exit strategy.