What Hard Money Loans Are and How They Work
This article is part of a larger series on Business Financing.
A hard money loan is mortgage financing for businesses that are unable to secure other types of traditional financing due to poor credit or properties in disrepair. Due to high interest rates and high fees, this is usually considered last-resort mortgage financing.
Hard money loans are short-term financing, with a maximum term of fewer than 18 months. At the end of the term, the property is flipped and sold for profit or refinanced into permanent financing at a lower rate and a longer term.
One advantage of hard money loans is fast funding times. Some hard money loans can be funded within five days, which is considerably less than the 30 to 60 days for a traditional mortgage. This allows hard money loans to compete with cash buyers for fix-and-flip properties.
Hard Money Loans at a Glance
- Hard money loans are mortgage loans with high interest rates and high fees that are considered “last resort” financing.
- Hard money loans have fast funding times―in some cases within five days―that allow you to compete with cash buyers.
- The term of a hard money loan is usually between 12 to 18 months, after which time the property is flipped or refinanced.
- Use a hard money loan calculator to determine the true costs of a hard money loan.
- If you need a hard money loan, Kiavi is a great choice, with no hidden fees and funding in as soon as five days.
When you receive funding from a hard money loan, repayment is usually interest-only until the end of the loan term, at which time a balloon payment is due. This allows you to control your cash flow with lower payments during the property repair period.
Once the loan term ends, you can sell the property and use the proceeds to pay off the loan. You can also refinance the property into permanent financing. Keeping the property allows you to continue repairs for a potentially larger profit later on, or you can use it as an investment property and rent it out for revenue.
If you’re looking for a hard money loan, Kiavi is an excellent choice. With funding in as soon as five days, no hidden fees in closing costs, and no personal income qualifier, Kiavi can provide a hard money loan of up to $3 million for up to 12 months. Visit Kiavi’s website for more information.
If you’re considering a hard money loan, it’s critical that you run an investment property cash flow projection to make sure the rental income or fix-and-flip profits cover all costs, including the costs of the hard money loan. Focus on positive cash flow and calculate all projected income and expenses.
Hard Money Loan Rates, Terms & Qualifications
Credit requirements tend to be lower for hard money loans than for other types of mortgage loans. However, the lower your credit score, the higher your interest rates and the higher the fees you’ll pay upfront. Part of the upfront fees includes points the lender charges, which can be as much as 10% of the loan amount. Some hard money lenders will require you to have previous flipping experience, while others will lend to first-time flippers.
Because the risk involved with hard money loans is high, due either to the borrower’s lower credit or the property’s condition, hard money loans have among the highest commercial real estate (CRE) loan rates of any CRE mortgage loan. Before considering a hard money loan, use a hard money loan calculator to understand the true costs of the loan.
You’ll need two to three months of bank statements and basic information about the property when you apply. You’ll need to know the address, the asking price, and any information about the property’s condition the lender should know upfront.
Depending on the project, you may also need contractor bids, a list of repairs to be completed, and information on past projects you have completed. Once approved, you can be funded in as few as five days.
For more general information on obtaining a hard money loan, check out our guide to getting a small business loan.
Who a Hard Money Loan Is Right For
Hard money loans are typically used by fix-and-flip investors or buy-and-hold investors. Fix-and-flip investors will purchase the property, fix it, and sell it before the hard money loan term ends. The hard money loan they obtain will be based on the property’s ARV, which is the fair market value after repairs are completed. Most hard money lenders will allow you to borrow up to 75% of the ARV of a property.
Buy-and-hold investors are looking for properties that might be in disrepair and so won’t qualify for a traditional mortgage loan. They’ll fix the property using a hard money loan, but then they’ll refinance into a conventional mortgage loan and keep the property as a rental.
A buy-and-hold investor can use a hard money loan to compete with all-cash buyers, as they often can receive funds in less than two weeks. Once they win the bid and obtain the property, they’ll refinance into permanent financing.
Hard Money Loans Pros and Cons
| PROS | CONS |
|---|---|
| Fast closing and funding time | High interest rate |
| More lenient qualification requirements | High fees and down payments |
| Interest-only payments help with cash flow | Very short term—must refinance or sell within 18 months |
Hard Money Loan vs Conventional Mortgage
Terms, Costs & Qualifications | Hard Money Loan | Conventional Mortgage Loan |
|---|---|---|
Interest Rates | 4.5% to 12% | Conventional Mortgage Loan |
Loan Amount | Usually $3 million to $20 million, some higher | Up to $1,867,275 for multifamily conforming, larger for jumbo loans and portfolio loans |
Term | 12 to 18 months | 15 to 30 years |
Usually up to 90% | N/A | |
Usually up to 75% | N/A | |
When considered, up to 80% | 80% to 97% | |
Closing Costs | $1,000 and higher | 2% to 5% of amount borrowed |
Lender Fees | Usually between 1.5% and 7% of loan amount | Up to 3% origination fee, appraisal and application fees will vary |
Time to Funding | Five to 21 days | 30 to 60 days |
Minimum Credit Score | 600 | 680 |
Personal Income Qualifier | Varies | Varies |
Flipping Experience | Some allow first-time flippers; others require multiple previous flips | N/A |
Other Requirements | Personal and company bank statements, list of past projects, and purchase contract | Debt-to-income (DTI) ratio of lower than 45%, two years of personal taxes in addition to business taxes |
Provider |
Hard money mortgage loans have higher interest rates, shorter terms, more lenient qualification requirements, and faster funding times. Conventional mortgage loans have lower rates, longer terms, more stringent qualification requirements, and longer funding times.
When refinancing a hard money loan to a long-term mortgage, you’ll use investment property financing, otherwise known as a conventional mortgage loan.
Investment property financing has to follow Federal National Mortgage Association (Fannie Mae) maximum loan size requirements, with two exceptions:
- Jumbo loans, which are loans that lenders approve to exceed those maximum requirements
- Portfolio loans, which don’t have to conform to Fannie Mae limits because they aren’t sold on the secondary market
Alternatives To Hard Money Loans
If the high interest rates and fees make you want to consider other types of mortgage loans, here’s a list of some alternatives:
- Cash-out refinance: If you have an existing property with built-in equity, you can do a cash-out refinance to use the proceeds to purchase a property that might not qualify for a traditional mortgage loan. Visio Lending is an excellent choice for a cash-out refinance lender.
- Home equity loan (HEL) or home equity line of credit (HELOC): Similar to using a cash-out refinance, you can take out a HEL or a HELOC and use either to purchase a property for a lower rate than a hard money loan. Your local bank or LendingTree can provide either HEL or HELOC products.
- Bridge loan: A bridge loan is used in the same way as a hard money loan. It’s short-term financing, often interest-only, that allows you to make repairs and then refinance. Bridge loans typically have lower rates and fees than hard money loans. AVANA Capital is a great choice for a commercial bridge loan provider.
- Private money lenders: These are loans offered by non-traditional lenders, or even property owners, to compete with all-cash buyers on a property purchase. They can have flexible terms, but they can also have high interest rates and fees.
Bottom Line
Hard money loans are mortgage loans used by borrowers who cannot obtain traditional mortgage financing due to poor credit or property in disrepair. They’re usually considered last-resort financing due to high interest rates and fees. However, they can provide quick access to mortgage funding, allowing you to compete with all-cash offers on properties. Use a hard money loan calculator to understand the costs involved, consult your financial advisor, and consider all other options before considering a hard money loan.
