A hard money loan is a short-term financing option used to fund the purchase of an investment property. Hard money loans are commonly used by real estate investors for fix-and-flip projects, renovations of rental properties, or simply to facilitate the speedy purchase and transfer of real estate.
LendingHome, who sponsored this article, offers hard money loans to both fix-and-flip investors and investors looking to buy and renovate rental properties. Rates start as low as 7.5% and they can prequalify borrowers online in minutes.
What is a Hard Money Loan?
A hard money loan is a short-term mortgage for investment properties. They can fund the purchase and/or renovation of a property. Hard money loans can be obtained more quickly than traditional mortgages and the qualifications are more flexible, too. A hard money loan is a tool frequently used by both fix-and-flip investors and investors looking to build a rental portfolio.
Hard money loans are short-term financing options that give investors flexibility and speed when investing in real estate. Investors typically like hard money loans when they need quick pre-qualification, a fast time to funding, few borrower qualifications, interest-only payments, a short loan term, and / or when they need to finance a rehab.
The trade-off for this increased speed and versatility is that hard money loans can seem a little expensive. They typically have rates of 7% – 12% and lenders charge a fee upon disbursement of 1-10% (each percentage point called a “point”). This only seems expensive until you remember hard money loans have short terms, usually only 1-3 years, and feature interest-only payments.
Short-term investors typically use hard money rehab loans to fix-and-flip a property within 12 months or less. Long-term investors typically use a hard money loan to purchase and renovate a fixer-upper before refinancing to a conventional mortgage and renting the property to tenants.
These uses are why hard money loans are also referred to as bridge loans. They help investors “bridge the gap” between the purchase of their investment to the sale or refinance of the property.
Some long-term investors, however, are “portfolio investors,” meaning they own multiple investment properties. When this is the case, traditional banks sometimes won’t issue a conventional mortgage if the investor already has between 4 – 10 mortgages. The restrictions of traditional lenders make hard money loans a useful option even for buy-and-hold investors.
Further, since hard money loans have a quick approval and funding times, real estate investors of all stripes will use them to compete with all-cash buyers at a real estate auction. For more information on nationwide lenders that offer hard money loans, check out our hard money lender directory.
Want to see if you and your project can get prequalified for hard money financing? Get prequalified online in just a few minutes with LendingHome. After answering a few questions about you, your experience, and the investment property you have in mind, LendingHome will let you know the exact rates & terms you prequalify for.
Who is a Hard Money Loan Right For?
Hard money loans are right for both short-term investors and long-term investors. Specifically, hard money loans are used by:
- Fix-and-Flippers – Short-term investors who will purchase, renovate, and sell a property within 12 months.
- Buy-and-Hold Investors – Long-term investors who will purchase a house in poor condition, renovate it, and then rent it out to tenants.
- Portfolio Investors – Long-term investors who would like to grow their portfolio of rental properties (typically 4+).
Let’s take a look at the different ways short-term investors and long-term investors use hard money loans.
Fix-and-flip investors are short-term real estate investors who look to purchase, renovate, and sell a property within 12 months. Hard money loans are good for short-term investors because they can finance both the purchase and renovation of a home in a single loan, have a short loan term, and offer interest-only payments.
For example, many short-term investors look for houses in poor condition, that if renovated, could sell for more than their current fair market value (FMV). These houses are typically found at short-sales, foreclosure auctions, as well as with lender-owned REO properties.
Using a hard money loan, fix-and-flip investors finance the initial purchase of the house as well as the necessary renovations. Fix-and-flippers typically obtain hard money loans equal to a percentage property’s after-rehab-value (ARV), which is the expected FMV after all renovations have been made.
Once a property is purchased with the initial funds from the lender, investors start their renovations, receiving renovation financing from hard money lenders in stipends or “draws.” This means that fix-and-flippers typically have to float rehab costs until they receive funds from the lender.
During renovations, fix-and-flippers pay a hard money lender interest-only payments. At the end of the hard money loan, fix-and-flippers repay the loan through the sale of the house for a profit. If you want to dig deeper into this, read our detailed example of how rehab loans work.
Buy-and-hold investors are real estate investors who purchase and renovate rental properties. Buy-and-hold investors typically use hard money loans when an investment property isn’t in good enough condition for a traditional mortgage.
This is because traditional lenders won’t issue conventional mortgages for houses in poor condition. However, dilapidated houses provide as much upside for long-term investors as they do for short-term investors.
To circumvent this funding problem, long-term investors use hard money rehab loans to finance the initial purchase and renovations of the asset. Once renovations are made, long-term investors rent out the property, refinance the improved home with a conventional mortgage, and use the money to pay off the hard money loan.
Sometimes a buy-and-hold investor who may qualify for permanent financing will need access to the financing right away, like when they’re competing with all-cash buyers at real estate auctions. In these cases, long-term investors rely on hard money loans for a quick approval process and a fast funding time.
Portfolio investors are long-term investors who invest in multiple properties at the same time. While these long-term investors prefer conventional mortgages, many banks and lending institutions only loan out between 4 – 10 conventional mortgages to a single person.
So, if a portfolio investor meets his or her conventional mortgage limit, the only financing options available are to either purchase a house all-cash, obtain a blanket mortgage, or use a hard money loan. Since most portfolio investors are highly levered to begin with, they typically rely on a hard money loan to make the additional property purchases.
This means that a portfolio investor might use a hard money loan to purchase houses in both good and bad condition. If the condition is poor, hard money lenders issue loans as a percentage of the house’s after-rehab-value (ARV). If the condition is good, hard money lenders issue loans as a percentage of a house’s loan-to-value (LTV) ratio, which is similar to the loan limits set by conventional mortgages.
Similar to buy-and-hold investors, portfolio investors sometimes use hard money loans specifically because they need the speed to compete with all-cash buyers. Finally, some portfolio investors might not meet other conventional mortgage qualifications – such as the minimum credit score – and therefore need to rely on hard money loans before meeting qualifications and refinancing at a later date.
Hard Money Loan vs Conventional Mortgage
Hard money loans have many differences when compared to a conventional mortgage.
For example, conventional mortgages are issued by banks, have strict loan requirements, a longer time to approval, a longer loan term, low interest rates and fees, and fund single-family homes, apartments, condos and multi-family units in good condition.
Conversely, hard money loans are issued by private money lenders such as LendingHome, have fewer loan requirements, a short approval time and loan term, comparatively higher interest rates and fees, as well as fund single-family homes, apartments, condos, and multi-family units in most conditions.
Take a look at the typical costs, terms, and qualifications of a hard money loan and a traditional mortgage in the table below. Afterward, read on for an in-depth explanation of the five main differences.
Hard Money Loan vs. Conventional Mortgage: Cost, Terms, Qualifications
|Hard Money Loan||Conventional Mortgage|
|Maximum Loan Amount||Up to 90% of LTV|
Up to 80% of ARV
|80% - 96.5% of LTV|
|Minimum Down Payment||10%+ of LTV|
20%+ of ARV
|3.5% - 20% of LTV|
|Interest Rates||7% - 12%||4% - 6%|
|Points (Lender Fees)||2 - 10 Points||0 - 1 Points|
|Typical Loan Term||1 - 3 years||15 - 30 Years|
|Time to Approval||As little as 3 minutes||30 - 45 Days|
|Qualifications / Information Needed for Approval||
|Property Type||Single family home + multi-unit property in most conditions||Single family home + multi-unit property in good condition|
|Where to Apply?||Visit LendingHome||Visit Your Local Bank|
1. Loan Amount
Conventional mortgages are issued by established banks and set loan amounts equal to a percentage of a house’s closing price. This is known as a property’s loan-to-value (LTV) ratio. Conventional mortgages typically issue a loan equal to 80% – 96.5% of a house’s closing price. This means that conventional borrowers should expect to cover a down payment up to 20% of the purchase price.
Hard money loans, on the other hand, are issued by private money lenders. Hard money lenders issue loans based on a house’s LTV ratio or after-rehab-value (ARV) ratio. The LTV of a hard money loan is similar to a conventional mortgage; hard money lenders such as LendingHome issue loans up to 90% of a house’s closing price. Hard money lenders use LTV when a house is in good condition.
ARV, on the other hand, is the expected fair market value of an underpriced house after renovations have been made. Hard money lenders use ARV when an investor seeks to either fix-and-flip a house in poor condition or rehab a rental property in poor condition. Hard money lenders such as LendingHome typical lend up to 75% – 80% of a house’s expected ARV.
Conventional mortgages have a 30 to 45 day approval time, have a loan term typically between 15 – 30 years, and are used to purchase long-term investments. Conversely, hard money loans offer a comparatively quicker approval time and have a loan term typically between 1 – 3 years. For LendingHome, the pre-qualification phase takes as little as 3 minutes, and the time to funding is usually 10 – 15 days.
3. Interest Rates and Fees
Conventional mortgages typically offer low interest rates between 4% – 6% and have little-to-no lender fees, known as “points.” One point equals a one percent fee on the loan; conventional mortgages usually have points between 0 – 1.
However, borrowers of conventional mortgages are expected to cover the closing costs, application fees, appraisal fees, and any other costs that facilitate the transfer of property ownership.
Interest rates on a hard money loan are comparatively high because of the short term and to compensate a lender for risk. Borrowers typically find interest rates between 7.5% – 12%. LendingHome, for example, has rates that start as low as 7.5%. Most hard money lenders allow for interest-only payments and the repayment of the loan in full at the end of its term.
Hard money loans also have lender fees between 2 – 10 points. This means that the lender fees on a hard money loan are equal to 2% – 10% of the total loan amount. Like conventional mortgages, hard money loans require the borrower to cover closing costs, application fees, appraisal fees, and any other costs associated with the purchase of a property.
4. Loan Qualifications & Requirements
Conventional mortgages have standard and comparatively strict loan qualifications. This is because conventional mortgages are issued by large banks in a highly regulated lending environment.
With conventional mortgages, lenders will want to see:
- Credit Score of 640+ (click here to check your credit score for free)
- Proof of Employment
- 2 Recent Paystubs
- Debt-to-Income Ratio under 50%
Beyond these personal qualifications, conventional mortgages limit the total number of mortgages to between 4 – 10, depending on the lender. Further, conventional mortgages are only issued on homes in good condition; they don’t fund the purchase and renovations of a house in poor condition.
National hard money lenders also have standardized loan qualifications for hard money loans. A national lender like LendingHome will expect to see:
- Credit Score of 550+ (click here to check your credit score for free)
- 2 – 3 Months of Bank Statements
- Property Locations & Purchase Price
- CV Detailing Experience and Prior Projects
Borrowers should then expect to provide their lender with a purchase contract, a list of past projects, as well as contractor bids and a rehab scope of work, if any.
Unlike conventional mortgages, there is no strict limit to the number of hard money loans. Further, hard money loans can finance the purchase of a property in almost any condition.
5. Property Type and Condition
Banks require that houses be in good condition prior to issuing a conventional mortgage. Conventional mortgages can finance the purchase of a single-family home, apartment, condo, as well as a multi-unit property in good condition.
Hard money loans, on the other hand, can finance the purchase of a house in almost any condition. Further, hard money loans can help fund renovations of a home while conventional mortgages don’t.
Hard money lenders typically use the loan-to-value (LTV) ratio when a house is in good condition and the after-rehab-value (ARV) ratio when a house is in poor condition. For example, LendingHome lends up to 90% of LTV and up to 75% of ARV.
Hard money loans can finance the purchase of a single-family home as well as a multi-unit property. Since hard money loans offer quick approval and a quick time to funding, they’re the preferred choice when it comes to purchasing a short-sale, REO, foreclosure, or any other house at auction.
What to Expect When Applying For a Hard Money Loan
National hard money lenders offer a standardized loan application process. LendingHome, for example, makes it easy to apply for a hard money loan by providing borrowers with an online application that that gets rid of unnecessary forms and documents.
With national hard money lenders like LendingHome, borrowers can use a secure online portal to upload the correct information and forms. This helps speed up and streamline the hard money lending process.
Let’s take a moment to discuss the required information and general application timeline of a hard money loan.
Required Information and Application Timeline
Most hard money lenders segment the loan application process into two parts:
- Pre-qualification – Quick approval process that gives a borrower a sense of their hard money loan options.
- Funding – Longer process that compiles more in-depth information to finalize a hard money loan’s costs, rates, and terms.
Let’s take a look at each of these application phases in more detail:
Borrowers typically use pre-qualification to get a thumb in the air understanding regarding their potential loan. After seeing their potential loan size, costs, fees, and terms, investors can use the information to set a maximum budget and move forward with the purchase of an investment property.
LendingHome, for example, uses this stage to help borrowers compile their loan options, compare different offers, and assess your financing choices. Specifically, you should expect to provide the following during the pre-qualification phase:
- Personal Bank Statements: 2-3 months of personal bank statements.
- Personal Credit Score: 550+ (Lenders will either request a “hard-pull” or “soft-pull” on your credit).
- Answers to Basic Questions: Hard money lenders typically ask a few questions regarding the borrower and the investment property, such as desired property address, expected offer amount, and more.
Based on this information, hard money lenders such as LendingHome provide borrowers with a list of hard money loan options. This gives investors the ability to say “yes” or “no” when assessing an investment property.
For more information on pre-qualification, check out our article on rehab loans.
Loan applications are approved during the funding phase. Lenders request additional and more specific information during this phase to make a final decision. If approved, lenders such as LendingHome issue the loan’s funds, allowing investors to close on a real estate deal.
During this phase, lenders typically look for more in-depth documentation, such as:
- Purchase Contract – A contract that outlines the purchase agreement between buyer and seller, including purchase price.
- List of Past Projects – For rehab projects, hard money lenders sometimes require a list of past rehab projects.
- Contractor Bids – If you’re inexperienced with rehab projects, hard money lenders allow you to work with a contractor and require contractor bids as part of the application.
- Scope of Rehab Work – Regardless of rehab experience, hard money lenders require a scope of rehab work if you intend to renovate an investment property.
- Appraisals – Hard money lenders conduct their own appraisals when assessing property value.
- Fees and Upfront Costs – Borrowers are expected to cover any upfront fees and costs that are taken out of the initial loan amount.
For more information on the funding phase, check out our article on rehab loans.
Hard money loans are useful for short-term fix-and-flippers as well as buy-and-hold investors looking to renovate investment properties. Hard money loans offer a short approval process, interest-only payments, and can fund the purchase and renovation of an investment property.
Hard money lenders such as LendingHome offer loan rates starting at 7.5% with 2.5 points or less. They offer financing up to 90% LTV or 75% ARV. Both short-term investors and long-term investors to get pre-qualified in minutes and LendingHome can have you funded in around 10 – 15 days.