Hard money loans are short-term, interest-only mortgages used by investors to purchase and rehab distressed properties. These loans have higher rates up to 12% but can fund in 15 days, helping investors compete with all-cash buyers. The loan is generally paid back within 12 months when the property is flipped or when permanent financing is obtained.
If you’re looking for a way to invest in a property fast, LendingHome offers hard money loans both for fix-and-flip investors and long-term investors looking to buy and renovate rental properties. They offer competitive rates to prime borrowers and you can prequalify online in just a few minutes.
How a Hard Money Loan Works
A hard money loan is used to fund the acquisition and rehab of investment properties. They can be obtained quicker than traditional mortgages and the qualifications are more flexible. A hard money loan is frequently used by both fix-and-flip investors looking to renovate and sell a property within 3 months to a year, as well as and long-term investors needing to renovate or season a property before refinancing to a permanent mortgage.
This means that regardless of investment timeline, investors use a hard money loan to purchase and renovate a property. During this time, you typically make monthly interest-only payments. There’s usually no prepayment penalty so you can repay the loan anytime. After acquiring and rehabbing the property, you typically sell it and repay the principal amount. However, long-term investors will use it to rehab or season a property before refinancing and paying off the hard money loan with the new long-term loan.
Investors typically like hard money loans because they offer quick pre-qualifications, fast funding times, few borrower qualifications, interest-only payments, and a short loan term. The trade-off for this increased speed and versatility is that hard money loans can seem a little expensive.
Hard money loans generally have:
- Rates: 7-12% with interest-only payments
- Lender fees: 1 – 10% (each percentage called a “point”)
- Term: 1-3 years
We will cover where to find hard money loans in a later section. For now, let’s look at exactly who a hard money loan is right for to ensure you’re getting the right financing product.
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 a Hard Money Loan is Right For
Hard money loans are generally right for short-term investors including fix-and-flippers who purchase, renovate, and sell a property within 12 months. They’re also right for long-term investors who purchase a house in poor condition, renovate it, and then rent it to tenants. These loans can be used to season a unit before refinancing it as well.
Hard money loans are generally right for two types of investors:
Fix-and-flippers use hard money loans because they can finance both the purchase and renovation of a home in one short-term, interest-only loan. Many short-term investors look for houses in poor condition, that if renovated, could sell for more than their current market value. These houses are typically found at short-sales, foreclosure auctions or 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 of a property’s after-repair-value (ARV), which is the expected fair market value 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,” typically in the form of a line of credit. 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 typically use hard money loans when an investment property isn’t in good enough condition to qualify for a traditional mortgage. This is because traditional lenders won’t issue conventional mortgages for houses in poor condition. Buy-and-hold investors can also use hard money loans to season units before refinancing into a permanent loan.
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 loan proceeds 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.
“A hard money loan is also intended for a borrower who cannot qualify for a conventional loan through typical underwriting such as a borrower with weak credit, judgments, tax liens, or other credit risks that require venturing into these higher cost loans.” – Stevan Pardo, Real estate/Construction Litigation Attorney, Pardo Jackson Gainsburg
Hard Money Loan Rates, Terms & Qualifications
Hard money loans have many differences when compared to conventional mortgages, such as easier qualifications, higher interest rates, shorter loan terms and shorter funding times. Hard money loans can be used to fund distressed properties as well as single-family homes, apartment buildings, condos, and more.
To help, let’s take a look at the typical costs, terms, and qualifications of a hard money loan vs. a traditional mortgage in the table below.
Hard Money Loan vs. Conventional Mortgage
|Maximum Loan Amount||Up to 90% of LTVUp to 75% of ARV||80% - 96.5% of LTV|
|Minimum Down Payment||10% + of LTV25% + of ARV||3.5% - 20% of LTV|
|Interest Rates||7% - 12%||4.5% - 6.5%|
|Points (Lender Fees)||2 - 10 Points||0 - 1 Points|
|Typical Loan Term||1 - 3 years||15 - 30 Years|
|Time to Funding||10 - 15 days||30 - 45 Days|
|Qualifications/Information Needed for Approval||Personal bank statementsPurchase contractList of past projectsContractor bid and scope of workAnswers to basic questionsDown paymentMin. credit score of 550Upfront costs and fees||Total monthly debtEmployment history2x current pay stubsDebt-to-income ratio less than 50%Min. credit score of 640|
Single-family home + multi-unit property in most conditions
Single-family home + multi-unit property in good condition
|Where to Apply?|
Loan Amount & Down Payment
Conventional mortgages are issued by established banks and set loan amounts equal to a percentage of a house’s purchase price. Conventional mortgages typically issue a loan equal to 80% – 96.5% of a house’s purchase price. This means that conventional borrowers should expect to cover a down payment up to 20% or more of the purchase price.
Hard money loans, on the other hand, are issued by private money lenders. Hard money lenders primarily issue loans based on a house’s loan-to-value (LTV) ratio or after-repair-value (ARV) ratio, though some will lend based on loan-to-cost (LTC). 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.
Hard Money Loan Timeline
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 a shorter loan term.
The specific hard money loan timeline is typically:
- Pre-qualification: As little as 3 minutes
- Time to funding: 10 – 15 days
- Loan term: 1 – 3 years
Hard Money Loan Rates and Fees
Typical hard money loan rates and fees are:
- Interest rates: 6.99% – 12%
- Lender fees: 2 – 10 points
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. By contrast, conventional mortgages typically offer low interest rates between 4% – 6% and have little-to-no lender fees, known as “points.” One point equals one percent of the loan; conventional mortgages usually have points between 0 – 1.
However, borrowers of conventional mortgages are also 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.
Hard Money Loan Qualifications & Requirements
National hard money lenders have standardized loan qualifications for hard money loans:
- Credit Score of 550+ (check your credit score free here)
- 2 – 3 Months of Bank Statements
- Property Locations & Purchase Price
- Detailed Experience of 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.
Conversely, conventional mortgages also 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.
Property Type & Condition
Banks require that houses be in good condition prior to issuing a conventional mortgage. Some conventional mortgages can finance the purchase of a single-family home, apartment building, condo, or multi-family property in good condition. Hard money loans, on the other hand, can finance the purchase and renovations of a house in almost any condition.
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.
Where to Find Hard Money Loans
Hard money loans are generally found through either local lenders or national and reputable online lenders. Local lenders can be referred to you by your real estate agent or local real estate investment group and they can also be found in our state-by-state hard money lender directory which has lenders in all 50 states. Online lenders can be found here in our best hard money lender guide, which compares the top reputable nationwide online lenders.
If you want to get pre-qualified today with one of our recommended nationwide online hard money lenders, then check out Lending Home. They offer competitive rates to prime borrowers and can get you prequalified in just a few minutes.
Hard Money Loan Application Process
National hard money lenders generally 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 and time-consuming forms and documents.
With national hard money lenders, 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 for 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 and can often be done online.
- Funding – Longer process that compiles more in-depth information to finalize a hard money loan’s costs, rates, and terms and grant an approval.
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 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+ (check your credit score free here)
- 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. The lender will also give the borrower a pre-approval letter which the borrower can give to the seller or seller’s real estate agent. This conveys the message that the borrower is qualified and can afford to purchase the property.
Loan applications are approved during the funding phase. Lenders request additional and more specific information during this stage 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.
The funding phase is more intense than the initial pre-approval or pre-qualification stage. The lender thoroughly evaluates the buyer’s financial standing by reviewing their documents in depth to decide if they’re worth the ‘risk’ of lending money.
They also determine if the property is one that they want to lend on based on its potential after-repair-value (ARV), purchase price, neighborhood and cost of repairs. Lenders typically use the 3 ‘c’s’ to decide if they will fund a project: credit reputation, capacity, and collateral. This means that they look at your credit score and the accounts on your credit report. Capacity is your ability to repay the loan so this is where your documented proof of income is needed. Lastly, collateral is
During this phase, lenders typically look for more in-depth documentation, such as:
- Purchase Contract – A signed 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 and proof of ownership which can be shown with a copy of your deed or settlement sheet.
- Contractor Bids – If you’re inexperienced with rehab projects, hard money lenders allow you to work with a contractor and they often require contractor bids as part of the application process.
- 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 and borrowers are generally expected to pay for these appraisals upfront. They’re usually $500+ depending on the property size and location.
- Fees and Upfront Costs – Borrowers are expected to cover any upfront fees and costs that are taken out of the initial loan amount which may include a loan origination fee and any other lender fees.
Frequently Asked Questions (FAQs)
What is a Hard Money Lender?
A hard money lender is an individual or private company that lends money to an investor based primarily on the real estate as collateral. They’re not regulated like banks so they have more lenient property and borrower qualifications. Fix-and-flippers and long-term investors use hard money lenders to get short-term loans that help them renovate and sell or refinance a property.
For 2018’s best hard money lenders, check out our hard money lenders guide.
What’s the Difference Between Hard Money and Soft Money?
In regards to real estate, hard money is usually considered a short-term loan or mortgage from a private lender that’s used to purchase and renovate an investment property. However, hard money and soft money also refer to political donations. Generally, hard money is from political donations that are regulated by the Federal Election Commission. Soft money is generally from nonregulated donations.
The distinction between hard money and soft money, therefore, has no meaning in the context of real estate. Instead, hard money specifically describes short-term loans with interest-only payments and that can finance renovations.
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 competitive rates for prime borrowers. They offer financing up to 90% LTV or 75% ARV. Both short-term investors and long-term investors can get pre-qualified in minutes and LendingHome can have you funded in around 10 – 15 days.