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 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 frequently is used by both fix-and-flip investors looking to renovate and sell a property within three 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 that 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 prequalifications, 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 have:
- Rates: 7% to 12% with interest-only payments
- Lender fees: 1% to 10%, each percentage is called a “point”
- Term: One to three 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 and terms you prequalify for.
Who a Hard Money Loan Is Right For
Hard money loans are 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 right for two types of investors: fix-and-flip investors and buy-and-hold providers.
Fix-and-Flip 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 typically are found at short-sales, foreclosure auctions, or lender-owned real estate 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 (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,” 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.
Get Prequalified for a Fix-and-Flip Loan
Buy-and-Hold Investors
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 fast funding time.
Get Prequalified for a Hard Money Loan
“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
“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.”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 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 LTV Up to 75% of ARV | 80% to 96.5% of LTV |
| Minimum Down Payment | 10% + of LTV 25% + of ARV | 3.5% to 20% of LTV |
| Interest Rates | 6.95% to 12% | 4.5% to 6.5% |
| Points (Lender Fees) | 0 to 10 points | 0 to 1 points |
| Typical Loan Term | 1 to 3 years | 15 to 30 years |
| Time to Funding | 10 to 15 days | 30 to 45 days |
| Qualifications/Information Needed for Approval | Personal bank statements Purchase contract List of past projects Contractor bid and scope of work Answers to basic questions Down payment Minimum credit score of 550 Upfront costs and fees | Total monthly debt Employment history 2x current pay stubs Debt-to-income ratio less than 50% Minimum credit score of 640 |
| Property Type | 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% to 96.5% of a house’s purchase price. This means that conventional borrowers should expect to cover a down payment of 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 ARV ratio, although 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 FMV 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 like LendingHome typically lend up to 75% to 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 to 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:
- Prequalification: As little as 3 minutes
- Time to funding: 10 to 15 days
- Loan term: One to three years
Hard Money Loan Rates and Fees
Typical hard money loan rates and fees are:
- Interest rates: 6.99% to12%
- Lender fees: Two to 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% to 6% and have little-to-no lender fees, known as “points.” One point equals 1 percent of the loan; conventional mortgages usually have points between zero and one.
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
- Two or three months of bank statements
- Property locations and purchase price
- Detailed experience of prior projects
Borrowers should then expect to provide their lender with a purchase contract and 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. Furthermore, 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 large banks issue conventional mortgages 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
- Two recent pay stubs
- Debt-to-income (DTI) ratio under 50%
Beyond these personal qualifications, conventional mortgages limit the total number of mortgages to between four and 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 multifamily 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 LTV ratio when a house is in good condition and the 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. Because 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 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 prequalified 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 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:
- Prequalification: 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 approval.
Let’s look at each of these application phases in more detail.
Prequalification Phase
Borrowers typically use prequalification 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 prequalification phase:
- Personal bank statements: Two or three 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 like 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 preapproval 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.
Funding Phase
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 like LendingHome issue the loan’s funds, allowing investors to close on a real estate deal.
The funding phase is more intense than the initial preapproval or prequalification 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 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 security or something of value that is used to secure the loan. Collateral, like a vehicle or property, is something that can be forfeited if the loan goes into default.
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 the 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 expected to pay for these appraisals upfront. They’re usually $500 or more 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.
Hard Money Loan 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 regard 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. Hard money is from political donations that are regulated by the Federal Election Commission. Soft money is 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.
Bottom Line
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. It offers financing up to 90% LTV or 75% ARV. Both short-term investors and long-term investors can get prequalified in minutes, and LendingHome can have you funded in around 10 to 15 days.
Tom Wang
Hi Allison
I am Canadian, I am a very successful flipper in Toronto. Now I am interested in US foreclosure house investment. Is it able for me to get the hard money loan ?
Tricia Tetreault
Hi Tom,
Whether or not you can get a hard money loan will depend on the qualification requirements of the lender. You are in a somewhat unique situation, in that you reside in Canada and are considering purchasing a property in the United States. While I have not seen hard money lenders specifically state that you must be a U.S. citizen to be eligible for a loan through them, it may be a requirement. I would advise contacting the lender(s) directly to see if they can extend financing to you as a Canadian citizen. Conversely, I’m unsure if a Canadian lender would extend funds on a property located outside of the country.
Adam Thielen
I have never flipped a home before but I am wanting to start doing this. Is it possible to get a hard money loan as a first time flipper?
Allison Bethell
Hi Adam:
Thanks for your comment. Generally, hard money lenders will work with first time flippers if they meet the lender’s other qualifications such as having enough cash reserves and downpayment, a qualifying FICO score, a property that they want to lend on and are purchasing in an area where they lend in. You will usually need to submit a contractor’s bid for the repairs needed to be done to the house. This shows that you’re working with a licensed contractor who knows what he/she is doing and that you know what the renovation budget will be. Check out our real estate investing section for more articles on finding properties to flip, how to start a house flipping business and more.
All the best,
Allison
Ted
Because hard money generally needs to be for business purposes for the loan to get approved.
And usually for NON-Owner Occupied properties
Allison Bethell
Hi Ted:
That’s correct hard money loans are generally for an investment property, not an owner occupied property. They’re geared towards investors looking for a short-term interest only loan that can close quickly and compete with the quick timeline of all cash buyers. Hard money lenders need to see the investor’s exit strategy, which is usually either flipping the property for a profit, or refinancing into a permanent loan.
Thanks for commenting.
Allison
Nick Hager
Very thoughtful and researched article. The marketplace is littered with Hard Money Lenders – so the choices and options people have now are limitless.
Allison Bethell
Hi Nick:
I’m so glad you enjoyed the article. Yes, there are so many hard money lenders to choose from these days. You can go with a local lender, or a nationwide online lender. Here’s a guide for you to check out on our top hard money lenders for 2018.
Thanks,
Allison
Christopher
I question the recent hard money loan processing. I am self-employed as a truck driver. I also drive and my own taxicab. When I needed to get a loan to renovate my home which I own free and clear, I was turned down for a conventional loan due to code violations on my home. While working to correct those violations and still needing to occupy this as my primary residence, I was directed to seek a hard money loan to make the corrections on my home with the intent to resolve the code violations. I was approved and funded after many months and several attempts. My question is why was this a business loan for my business? I was asked to handwrite that the purpose of the loan was to expand my business. I was directed to hand write a statement that the funds would be used for equipment for my business. My concern is that The loan broker knew it was not the truth as did the lender. My loan is secured by a deed of trust against my property. I am concerned that this may not have been completely legal and possibly fraud. Please advise if this is standard procedure/best practices with a hard money loan or is this fraud?
Evan Tarver
Hi Christopher,
Thanks for reaching out with your question. Unfortunately I’m not entirely sure if this is standard practice or not. I do know that with hard money lenders such as LendingHome, they allow you to take out a loan based on your personal credit score. I’m not sure why the lender required you to take the loan as a “business loan.”
I would speak with a lawyer or CPA with lending experience. Sorry I couldn’t help more and good luck with your businesses!
– Evan