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Hard Money Loans for Real Estate Investors

Hard money loans are short-term, asset-based loans provided by private lenders that prioritize the property's value and the borrower's equity position over personal income verification. Typically carrying interest rates of 9-14%, origination fees of 1-5 points, and terms of 6-24 months, these loans serve investors who need speed, flexibility, or financing for properties that do not qualify for conventional lending.

Key Takeaways

  • Hard money loans are collateral-driven: the property's value (as-is or after-repair) and the borrower's equity cushion are the primary underwriting factors, not personal income.
  • Interest rates typically range from 9% to 14%, with origination fees of 1 to 5 points, making hard money substantially more expensive than conventional or DSCR financing .
  • Loan terms are short, typically 6 to 24 months, with interest-only payments and the full principal balance due at maturity.
  • Funding speed is a core advantage: hard money loans can close in 7 to 14 business days compared to 30 to 45 days for conventional mortgages.
  • A defined and credible exit strategy (sale, refinance, or other repayment path) is a required underwriting element for every hard money loan.
  • Personal guarantees are standard, meaning the borrower's personal assets and credit are at risk if the investment fails and the property sale does not cover the loan balance.
  • Hard money is a temporary financing tool designed for acquisition and rehabilitation, not long-term holds. Investors should plan to exit into permanent financing or sell within the loan term.

How It Works

How Hard Money Loan Approval Works

The hard money approval process prioritizes speed and collateral assessment. The borrower initiates the process by contacting the lender with the property details, purchase price, requested loan amount, renovation scope (if applicable), and planned exit strategy. Many hard money lenders have an intake form or online application that captures this information. The lender reviews the submission and provides a preliminary indication of interest, often within 24 hours.

The lender then orders a property valuation, which may be a full appraisal, a desktop appraisal, a broker price opinion (BPO), or an internal valuation based on comparable sales data. For fix-and-flip transactions, the valuation includes an assessment of the property’s current as-is value and the projected after-repair value (ARV) based on comparable renovated sales. The lender uses these values to determine the maximum loan amount under its LTV and LTC guidelines.

The borrower provides a basic application, identification, proof of funds for the down payment or equity contribution, and in many cases, a scope of work and budget for the renovation. Some lenders require an entity (LLC) to take title to the property. The lender may review the borrower’s credit report, though credit requirements are less rigid than conventional lending: many hard money lenders work with scores below 650 and with borrowers who have recent derogatory events. The emphasis is on the deal structure, not the borrower’s financial history.

Once the valuation and documentation are reviewed, the lender issues a commitment letter outlining the loan terms: amount, rate, points, term, draw schedule (for renovation funds), and any conditions. Closing occurs at a title company or attorney’s office, similar to a conventional real estate transaction. The entire process from application to funding typically takes 7 to 14 business days.

How Renovation Draw Schedules Work

For fix-and-flip and renovation transactions, the lender funds the renovation portion of the loan through a draw schedule rather than providing all renovation funds at closing. The typical process works as follows: the lender finances the acquisition cost at closing (subject to the LTV limit), and the renovation funds are held in escrow or reserve. As the borrower completes phases of the renovation, the borrower requests a draw by submitting evidence of completed work (photographs, invoices, contractor lien waivers). The lender sends an inspector to verify the work is complete, and upon satisfactory inspection, the draw funds are released to the borrower.

Draw schedules are structured in phases, typically 2 to 5 draws over the course of the renovation. For example, a $100,000 renovation budget might be structured as four draws of $25,000 each, released upon completion of specific milestones: demolition and framing, rough mechanical (plumbing, electrical, HVAC), finishes (drywall, flooring, cabinets), and final completion. The borrower must fund each phase of work upfront and is reimbursed through the draw process, which means the borrower needs working capital to bridge the gap between spending on renovation and receiving the draw funds.

Inspection fees are charged for each draw (typically $150 to $300 per inspection ), and the lender may charge a draw processing fee as well. These costs, while individually modest, add up over multiple draws and should be included in the project budget. Delays in requesting or receiving draws can slow the renovation timeline, so borrowers should coordinate the draw schedule with their contractor’s payment expectations.

How Exit Strategies Are Evaluated

The exit strategy is the most scrutinized element of a hard money loan application because it determines how the lender will be repaid. Each exit type carries different risk profiles that the lender evaluates:

Sale after renovation: The lender evaluates the projected ARV against comparable sales, the renovation budget against the scope of work needed to achieve the ARV, the borrower’s experience completing similar projects, and the current market absorption rate (how quickly similar properties sell in the area). A projected ARV that is not supported by comparable sales or a renovation budget that appears insufficient for the scope of work will concern the lender.

Refinance into permanent financing: The lender evaluates whether the property, after renovation, will meet the requirements for conventional or DSCR financing. This includes whether the property will appraise at a value that supports the permanent loan amount, whether the borrower’s credit and income (for conventional) or the DSCR ratio will qualify, and whether any seasoning requirements (typically 6-12 months of ownership for a cash-out refinance) can be met within the hard money loan term.

Sale without renovation: For bridge loans or non-renovation transactions, the lender evaluates the current as-is value, the marketability of the property in its current condition, and the timeline for sale. Properties in markets with low absorption rates or unique characteristics that limit the buyer pool present higher exit risk.

Lenders may decline a loan if the exit strategy is unrealistic, the market conditions do not support the projected timeline, or the borrower lacks the experience to execute the plan. A solid exit strategy backed by market data and a realistic timeline is often the difference between approval and declination in hard money lending.

Related topics include fix-and-flip financing, cash-out refinance on investment property, and portfolio loans for real estate investors.

Key Factors

Factors relevant to Hard Money Loans for Real Estate Investors
Factor Description Typical Range
Interest Rate The annual interest rate charged on the outstanding loan balance. Hard money rates reflect the short-term, higher-risk nature of the lending and the private capital source. 9% to 14% annualized. Rates vary by lender, market, borrower experience, and deal structure .
Origination Points Upfront fees charged as a percentage of the loan amount, paid at closing. Compensate the lender for underwriting and capital deployment on a short-term loan. 1 to 5 points (1% to 5% of loan amount). 2-3 points is typical for a standard transaction .
Loan-to-Value / Loan-to-ARV The maximum loan amount expressed as a percentage of the property's as-is value or after-repair value. Determines the equity cushion protecting the lender. 65% to 75% of as-is value or ARV. Up to 85-90% of total cost (LTC) in some programs, subject to ARV cap .
Loan Term The duration of the loan before the full principal balance is due. Hard money terms are short to reflect the temporary nature of the financing. 6 to 24 months. 12 months is most common. Extensions available for 1-2 additional points per extension period.
Borrower Experience The borrower's track record with similar transactions. Experienced investors with completed projects may receive better rates, higher leverage, and faster approvals. First-time flippers may face higher rates and lower LTV. Borrowers with 5+ completed projects may receive preferred pricing and terms.

Examples

Fix-and-Flip with Hard Money Acquisition and Renovation Funding

Scenario: An investor identifies a distressed single-family home listed at $180,000. Comparable renovated homes in the neighborhood sell for $310,000. The investor estimates $80,000 in renovation costs. The investor applies for a hard money loan seeking funding for both acquisition and renovation. Total project cost: $260,000. The lender offers 85% LTC and 70% of ARV.
Outcome: Maximum loan at 85% LTC: $221,000. Maximum loan at 70% ARV: $217,000. The controlling limit is $217,000 (the lesser of the two). The investor must bring $43,000 in cash ($260,000 total cost minus $217,000 loan) plus closing costs. The loan is structured at 11% interest, 2 points origination ($4,340), 12-month term, with renovation funds disbursed through a 4-draw schedule. Monthly interest payment on the full $217,000: approximately $1,989. If the renovation takes 5 months and the property sells in month 8, total interest cost is approximately $15,912 plus $4,340 in points for a total financing cost of approximately $20,252.

Bridge Loan for Timing Gap Between Properties

Scenario: An investor is selling one rental property (expected to close in 90 days) and wants to acquire a new rental property that requires closing within 21 days. The new property purchase price is $275,000. The investor has $60,000 in available cash but needs $215,000 in financing. Conventional lender cannot close in 21 days.
Outcome: The investor secures a hard money bridge loan for $192,500 (70% LTV on the $275,000 purchase). The investor contributes $82,500 in cash. The loan terms are 10% interest, 1.5 points, 6-month term. When the existing property sells 90 days later, the investor uses the sale proceeds to pay off the hard money loan. Total cost for the 3-month bridge: approximately $4,812 in interest plus $2,888 in points = $7,700 in total financing cost. The investor weighs this cost against the risk of losing the acquisition opportunity.

Borrower with Credit Challenges Using Hard Money

Scenario: An experienced investor with 12 completed flips has a credit score of 590 due to a bankruptcy discharge 18 months ago. The investor identifies a strong flip opportunity with $180,000 purchase price, $50,000 renovation, and $300,000 projected ARV. Conventional and DSCR lenders decline due to the recent bankruptcy and low score.
Outcome: A hard money lender approves the loan based on the strong collateral (70% of ARV provides a $210,000 maximum loan against $230,000 in total costs), the experienced borrower track record, and a credible renovation plan and exit strategy. The rate is 13% (higher than a borrower with good credit would receive) with 3 points, reflecting the elevated borrower risk. The borrower contributes $50,000 in cash and completes the project profitably despite the premium financing cost, using the successful flip to rebuild credit and savings toward qualifying for conventional financing on future projects.

Common Mistakes to Avoid

  • Using hard money as long-term financing instead of a temporary bridge

    Hard money is designed for short-term use (6-24 months). Interest rates of 9-14% on an interest-only basis accumulate rapidly. An investor who fails to execute the exit strategy and rolls one hard money loan into another faces compounding costs that can consume the entire profit margin and equity in the property. Hard money should always have a defined exit plan with a realistic timeline.

  • Underestimating renovation costs and timelines

    Cost overruns and delays are the most common reasons fix-and-flip projects fail. A renovation budget that lacks contingency (typically 10-20% above the base estimate) and a timeline that assumes no permitting delays, material shortages, or contractor issues is unrealistic. The hard money loan's clock is ticking from day one, and every month of delay adds interest expense that reduces the profit margin.

  • Not verifying the hard money lender's legitimacy and licensing

    The hard money market includes reputable institutional lenders and also individuals and entities that may not be properly licensed or may offer terms that are predatory. Borrowers should verify state licensing, request references from other investors, review the loan documents with an attorney, and confirm that the lender has a track record of funding and closing loans. Advance fee scams, where a lender collects fees before funding and then disappears, exist in this space.

  • Failing to account for all costs in the profit analysis

    Hard money costs extend beyond the interest rate: origination points, draw inspection fees, extension fees, closing costs (both acquisition and sale), title insurance, property taxes during the hold period, utilities during renovation, insurance, and the cost of money tied up in the project (opportunity cost of the cash invested). Investors who calculate profit based only on purchase price, renovation, and sale price without including all carrying and financing costs will overestimate returns.

Documents You May Need

  • Loan application with property details, purchase price, renovation budget, and exit strategy description
  • Government-issued identification
  • Proof of funds for down payment and closing costs (bank statements or asset documentation)
  • Scope of work and contractor estimates for renovation projects
  • Purchase contract or auction confirmation documentation
  • Entity documentation if purchasing through an LLC (articles of organization, operating agreement, EIN)

Frequently Asked Questions

What is a hard money loan?
A hard money loan is a short-term, asset-based loan provided by private lenders that uses the real estate as primary collateral. The loan is underwritten based on the property's value and the borrower's equity rather than the borrower's personal income. Hard money loans typically carry interest rates of 9-14%, origination fees of 1-5 points, and terms of 6-24 months .
How fast can a hard money loan close?
Most hard money lenders can provide preliminary approval within 24-48 hours and fund the loan within 7 to 14 business days. Some lenders can close even faster for experienced borrowers with streamlined documentation. This compares to 30-45 days for conventional mortgages, making hard money the preferred tool when closing speed is critical.
What credit score do I need for a hard money loan?
Hard money lenders have more flexible credit requirements than conventional or DSCR lenders. Many will work with credit scores below 650, and some will lend to borrowers with recent bankruptcies or foreclosures if the deal structure is strong. However, borrowers with lower credit scores can expect higher rates and lower leverage. The property's value and the exit strategy carry more weight than the credit score in hard money underwriting.
What is the difference between LTV and ARV in hard money lending?
LTV (loan-to-value) measures the loan amount against the property's current as-is value. ARV (after-repair value) measures the loan against the property's projected value after renovation. Hard money lenders use both metrics: the maximum loan may be 65-75% of the as-is value or 65-75% of the ARV, whichever produces the lower number. For fix-and-flip loans, the ARV calculation determines the total available leverage including renovation funds.
What happens if I cannot repay the hard money loan at maturity?
If the loan reaches maturity and the borrower cannot repay through sale or refinance, the lender may offer an extension for an additional fee (typically 1-2 points). If no extension is granted or the borrower cannot pay the extension fee, the lender can initiate foreclosure proceedings to recover the collateral. Because hard money loans include personal guarantees, the lender may also pursue the borrower personally for any deficiency balance, depending on state law.
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