- Hard money loans can be used for fix and flip projects, bridge loans, rental properties, and commercial real estate development.
- They’re an excellent option for short-term financing, particularly for borrowers with unique credit profiles or financial situations.
- Hard money loans can be based on a property’s expected ARV, or after repair value, rather than the current condition of the property.
Hard money loans are an asset-based loan financing type by which a borrower receives funds secured by real property. These loans are usually issued by private investors or companies. Interest rates for hard money loans are typically higher than conventional commercial or residential property loans, mainly due to the loan’s higher risk and shorter duration.
For most hard money loans, the loan amount is based on the value of the property used as collateral. Lenders usually lend up to 70% of the property’s after-repair value (ARV). In some cases, the loan amount can be based on the total value of the property, including the land (TVL).
They are usually short-term loans, lasting from one to five years. The loan amount is typically paid back in monthly installments, and the loan terms can be flexible to accommodate the borrower’s needs. If you are considering taking out a hard money loan or working with a hard money lender, it is crucial to understand the risks and benefits involved.
This guide will explore the big questions behind hard money loans, what you need to get a hard money loan, and everything and anything you wanted to know about hard money loans and lenders.
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What is a hard money loan?
A hard money loan is a loan that is used to finance the purchase of a piece of property. The property itself secures the loan, so if the borrower defaults on the loan, the lender can foreclose on the property and recoup their losses. Hard money loans are typically used by investors who are looking to purchase a property quickly and without a lot of hassle. Because the property secures the loan, the lender is more likely to approve the loan, even if the borrower has less-than-perfect credit.
Of course, there are a few downsides to hard money loans. They typically come with high interest loan rates and fees. This means borrowers must be prepared to make higher monthly payments. Additionally, if the borrower defaults on the loan, they could lose their investment property.
How hard money loans work
For the uninitiated, hard money loans can seem like a bit of a mystery. How do they work? Why are they so expensive? And what exactly is “hard” about them?
Here’s a quick primer on hard money loans:
Hard money loans are asset-based loans, meaning that they are secured by collateral (usually real estate). This makes them less risky for lenders, who can foreclose on the property if the borrower defaults.
Hard money loans are also typically shorter-term loans, with terms of 1-5 years. That’s because they are generally meant to be used for short-term financing needs, like bridge loans or rehab loans.
Interest rates on hard money loans are typically higher than traditional loans because they are considered to be higher risk. Rates can range from 8% to 15% or more. Hard money loans are typically funded by private individuals or companies rather than banks or other financial institutions.
Types of hard money loans
There are several different types of hard money real estate loans, each with their own unique benefits and drawbacks. But which one is right for you? Here is a brief guide to the most popular types of hard money loans to help you make the best decision for your individual financial situation.
Fix and flip hard money loans
Fix and flip hard money loans are a type of loan that real estate investors use to purchase, renovate, and sell a property for a profit. These loans are usually short-term, interest-only loans secured by the purchased property. One of the main advantages of using a fix and flip hard money loan is that it can allow flippers to buy a property without having to put any money down.
A savvy strategy utilizing fix and flip hard money loans can be a great way to get started in the real estate investing business without having to tie up a lot of your own cash. Additionally, these loans can be used to fund a property’s entire purchase and renovation. This can be a massive benefit if you are working with a limited budget.
The downside of fix and flip hard money loans is that they can be expensive. The interest rates on these loans are typically much higher than traditional loans, so you will need to be sure that you can make a profit on the sale of the property to make it worth your while.
Bridge hard money loans
A bridge hard money loan is a specific type of asset-based loan financing through which a borrower receives funds secured by real property.
Bridge loans are used to provide interim financing when a borrower is expecting to receive long-term financing soon. For instance, someone might use a bridge loan to finance the purchase of a new home before the borrower’s current home is sold.
They are generally more expensive than other types of financing, so they are typically used as a last resort. Borrowers should be prepared to pay higher interest rates, origination fees, and closing costs on a bridge loan.
Rental hard money loans
A rental hard money loan is a loan purpose-built for real estate investors who are looking to invest in rental properties. These properties commonly include 2-4 unit multifamily properties, vacation rentals, warrantable condominiums, and townhomes. Rental hard money borrowers can seek out financing under various loan programs, including 30-year amortizing loans, interest-only loans, or ARMs, aka adjustable-rate mortgages.
There are several different ways investors use these loans. A typical scenario involves refinancing out of a hard money loan into a lower rate and longer term once the property rehab is complete, tenants are in place, and the property is cash flowing. That process is then repeated by investors, allowing them to acquire multiple properties in a flash- with very little money invested. This is also known as the BRRRR Method, which stands for Buy, Rehab, Rent, Refinance, Repeat.
If an investor is not particularly interested in overseeing renovations, they can use a hard money rental loan to acquire the property with a minimal documentation option based on the Debt Service Coverage Ratio, or DSCR. If you’re interested in learning more about DSCR loans and how to find the best lender in your state, check out this comprehensive guide, DSCR Loans: Find the Best Lenders.
Commercial hard money loans
Commercial real estate hard money loans are a type of funding used to finance the purchase or renovation of commercial properties. Private investors or companies typically provide hard money loans, and they are usually used for short-term financing, often for a period of 12 months or less. Hard money loans can be a helpful financing option for borrowers who may not qualify for traditional bank financing.
Commercial real estate hard money loans are typically secured by the purchased or renovated property. The loan amount is generally based on a percentage of the property’s value. Interest rates on hard money loans are typically higher than rates on traditional bank loans, and hard money loans often have shorter terms.
Commercial hard money lenders specialize in complex commercial projects and leverage the power of in-house lending origination, giving borrowers the ability to solve the often complex challenges that can arise in the real estate business. Again, every lender is different, but you can expect to see loan sizes between $200,000 and $20,000,000. Commercial hard money lenders work on fast timelines- often sending out pre-approval letters within 24 hours and funding the deal itself in a week or less.
Most lenders offer up to 60% LTV and 60% ARV for rehabilitation loans, typically not exceeding 90% of the purchase price. Loan terms range from 3 to 24 months, and interest rates range from 8.5% to 10.5%; however, these numbers are creeping up in an era of interest rate hikes. Borrowers make interest-only payments and pay origination fees of 1-5 points, determined by the property’s location, borrower’s creditworthiness, LTV, and the loan amount and term.
Hard money construction loans
A hard money construction loan is a specific type of financing used to fund the new construction of a home or other real estate project. Unlike a traditional mortgage, which is based on the borrower’s creditworthiness, a hard money loan is secured primarily by the property’s value.
This type of loan is typically used by private money lenders to fund developers or investors looking to finance a high-risk project that may not qualify for traditional financing. Because the property secures the loan, lenders are often willing to provide financing even if the borrower has poor credit.
These loans typically have shorter terms than traditional mortgages and tend to carry higher interest rates. Borrowers should be prepared to make a larger down payment and to make interest-only payments during the construction period. Once the project is completed, the borrower can either refinance the loan into a traditional mortgage or sell the property to repay the loan.
Hard money construction loans can be a great way to finance a high-risk real estate project, but borrowers should be aware of the risks involved. If you’re looking for a more in-depth guide focused on construction loans, check out this comprehensive article: Construction Loans: What You Need to Know in All 50 States.
Types of hard money lenders
There are many different types of hard money real estate lenders out there, each with their own unique set of benefits and drawbacks.
Here’s a look at some of the most popular types of hard money lenders:
Mortgage funds are one of the most popular types of hard money lenders. They typically offer quick funding, competitive rates, and flexible terms. However, they can be challenging to qualify for and often have strict lending criteria. Mortgage funds range in size, from small outfits of 10 or 20 investors all the way up to large groups with 1,000 or more investors working in concert.
They typically offer business-oriented first position loans worth up to 65% LTV. Some outlier mortgage funds will approve up to 75% LTV on certain bridge loans, typically when the borrower has a track record of success in flipping houses.
Fix and flip funds
Fix and flip funds are a type of hard money lender that specializes in funding fix and flip projects. These hard money lenders operate in two unique ways.
Fix and flip portfolio fund
This is a fund that is made up of investor capital, similar to mortgage funds which we covered above. Portfolio funds commonly offer higher leverage fix and flip loans that cover as much as 90% of the purchase price of a given property. These lenders typically want to see their loans perform at a high level, at least initially, because those loans will sit on their books for as long as a year.
Conduit fix and flip lender
These fix and flip lenders also originate loans for up to as much as 90% LTV- the key difference is that they then sell these loans to secondary market fixed income managers and investors. They’re called “conduit lenders” because they act as a conduit from the borrower to the secondary market investor.
Like portfolio lenders, conduit lenders want to see borrowers make payments on time because they run the risk of seeing buyback provisions executed by secondary market investors should a loan go into default.
Both lender types seek out borrowers with high liquidity, verified experience, and a significant chance that the value-added work done to the property will lead to a sale that matches up with the ARV, or “After Repair Value,” determined by the borrower during the loan application process.
High net worth individuals
High net worth individuals are another type of hard money lender. They typically have more flexible private lending criteria than some other types of lenders, but they may not be as quick to fund your loan. These individuals come from a variety of backgrounds, including successful investors and businesspeople- with the common thread between them being the fact that they want to diversify their portfolios via investing in mortgage loans.
The underwriting criteria for these individuals will vary greatly from person to person, but many prefer to work with business-purpose first mortgages, though they also sometimes offer up other types of borrowed capital, including construction completion and business-purpose second mortgages.
Mortgage broker-sourced multiple lender loans
Another type of hard money lender is a mortgage broker. Mortgage brokers source loans from a variety of different lenders, including private individuals, and they typically have access to a wider range of loan programs than a single lender would. Mortgage brokers may be a good option for borrowers who are having trouble qualifying for a loan from a single lender. They often set up hard money loans with several trust deed investors financing the loan. In some cases, it just makes sense to pair investors who are on a similar timeframe, enabling projects that might otherwise go unrealized.
Real estate offices
Unsurprisingly, real estate offices also offer hard money real estate loans. Largely as a result of the substantial appreciation and lower cap rates we’ve seen in markets across the US, many real estate offices changed gears, stopped buying new properties, and instead set up entities that offer hard money loans.
In most cases, real estate offices limit loan offerings to business-purpose loans with up to a 65% LTV ratio- although this number may change from office to office. While they primarily work with first position mortgages, they’ll, on occasion, lend in second or third position, depending on the individual property, the borrower’s profile, and the terms of the first mortgage.
Similar to the real estate offices we covered above, family offices often hold significant real estate assets, including direct ownership of properties, as well as investments in various hard money lending types, including hard money loans. For the uninitiated, a family office is a privately held company that takes care of wealth management on behalf of a wealthy family, typically one with at least $100 million in assets.
In a similar vein to the trajectory of real estate offices, many family offices halted acquiring new properties and instead began offering hard money loans, with some even taking out loans against their own real estate portfolios. They seek to earn a spread between the yield they get from the hard money loans and the amount they’re paying on their current commercial mortgage.
Also, similarly to real estate offices and mortgage funds, family offices try their best to limit their credit risk, typically going after business-purpose first position loans at somewhere around 65% LTV. On occasion, they may offer low-leverage second trust deeds as well as cross-collateral loans with a single loan against multiple properties.
Hard money loan eligibility requirements
When it comes to hard money loans, there are a few eligibility requirements that borrowers need to be aware of, both on the borrower side and the lender side.
Hard money loan borrower qualifications
When it comes to hard money loans, specific borrower qualifications must be met to be approved for funding. While each lender may have their own particular qualifications, there are some general qualifications that most hard money lenders typically require.
First and foremost, borrowers must have a good credit score. This is one of the most important qualifications, as it shows the lender that you are a responsible borrower who will likely repay the loan.
Another essential qualification is having a down payment. Most hard money lenders will require a down payment of at least 20% of the purchase price. This shows the lender that you are serious about the purchase and have “skin in the game.”
A property in mind
In addition, borrowers must also have a property in mind that they are looking to purchase. The property must be located in an area the lender is willing to lend in and must also meet the lender’s criteria for a good investment.
Verified financial information and credit file
Finally, borrowers must also be prepared to provide the lender with financial documentation such as tax returns, bank statements, and pay stubs. This documentation is necessary for the lender to determine whether or not you are a good candidate for a hard money loan.
If you meet the above qualifications, you should have no problem securing a hard money loan. However, it is important to remember that each lender has their own specific qualifications that you will need to meet in order to be approved for funding.
Hard money loan property qualifications
Perhaps the most important hard money loan requirement is equity, aka the real property you plan to use to secure the loan. Direct lenders love equity because it offers them security and the knowledge that they’ll be able to at least salvage some value should you default.
If you’re looking for a hard money loan to flip homes, the lender will look at the equity in the property you plan to rehab/restore. However, other forms of equity are out there, depending on how much you need to borrow.
More than anything, hard money loans are deal-specific. This means that any lender will look at each deal on its own merits, including the characteristics of the property to be used as collateral. Hard money loan property qualifications differ substantially from those used for a traditional mortgage.
While hard money lenders will look at your overall financial health, credit score, DTI, etc., they’re more concerned with the hard asset, aka the property in question. If they’re able to secure enough equity in the property, they’ll probably fund the loan.
Minimum credit score for hard money loans
As with any loan, certain requirements must be met in order to qualify. But one of the most important factors lenders will look at is your credit score.
So, what is the minimum credit score for hard money loans? Generally speaking, the minimum credit score for hard money loans is 600. However, some lenders may consider loans for borrowers with lower credit scores on a case-by-case basis.
Your credit score is such an important factor for hard money lenders because these loans are typically higher risk than traditional loans. As such, they need to be sure that borrowers can repay the loan on time.
That being said, there are several other factors that lenders will consider when determining whether or not to approve a hard money loan. These can include the property’s value, the borrower’s experience, the loan-to-value ratio, and more.
Minimum down payment requirements for hard money loans
If you’re looking to get a hard money loan, one of the first things you’ll need to do is come up with the minimum down payment. While the amount you’ll need to put down will vary depending on the lender, there are some general guidelines you can follow.
The first thing to keep in mind is that most hard money lenders will require you to put down at least 20% of the loan amount. So, if you’re looking to borrow $100,000, you’ll need to come up with at least $20,000.
However, it’s important to note that some lenders may require you to put down even more than 20%. So, if you’re looking to get a loan from a particular lender, be sure to ask about their minimum down payment requirements.
In addition to your down payment, you’ll also need to have funds available to cover the closing costs. These costs can vary depending on the lender, but they typically range from 2% to 5% of the loan amount. So, if you’re borrowing $100,000, you’ll need to have $2,000 to $5,000 available for closing costs.
How to get a hard money loan
You’ve found a fantastic investment property but don’t have the cash to buy it outright.
You’ve also been turned down for a traditional bank loan. What do you do? Get a hard money loan.
The process of getting approved for a hard money loan is relatively simple. Here are the steps you need to follow:
1. Find a hard money lender.
The first step is to find a hard money lender. Many companies offer these types of loans, so it’s vital to do your research to find the best one for your needs. You can search online, ask other investors for recommendations, contact your local Chamber of Commerce, or seek out a lender online- there are bound to be plenty.
2. Submit your loan application.
Once you’ve found a lender, you’ll need to submit a loan application. This will include information about the property you’re looking to purchase and your financial information. The lender will use this information to determine if you’re a good candidate for a loan and how much they’re willing to lend you.
3. Get pre-approved.
After your loan application is approved, you’ll receive a pre-approval letter. This letter will state the maximum loan amount that you’re eligible for.
4. Find a property.
Now it’s time to find a property that meets your investment criteria. Once you’ve found a property, you’ll need to submit an offer to the seller.
5. Negotiate the terms of your loan.
If your offer is accepted, you’ll need to negotiate your loan’s terms with the lender. This will include the interest rate, loan term, and any other conditions.
6. Close on the loan.
Once the terms of your loan have been finalized, you’ll then need to close on the loan. This process typically takes 30-45 days. Once the loan has closed, the property will be transferred to your name, and you’ll be able to start working on your investment.
Hard money loans are a great option for investors looking to purchase property quickly. By following these steps, you can secure a loan and close on your investment property in no time.
Top 3 factors to consider with a hard money loan
There are a few key factors to keep in mind when it comes to hard money loans. Here are the top three factors to consider:
1. The interest rate:
One of the most important factors to consider with a hard money loan is the interest rate. Your interest rate will directly impact your monthly payments, so you want to make sure you shop around and compare rates before selecting a loan.
2. The loan term:
Another key factor to consider is the loan term. Your loan term refers to how long you have to repay the loan, which can vary depending on the lender. Make sure you select a loan term that you’re comfortable with and that you can afford the monthly payments.
3. The loan amount:
The loan amount is another critical factor to consider. It is the total amount of money you’re borrowing, which can impact the interest rate and the monthly payments. Make sure you borrow only what you need and that you can afford the monthly payments.
Top 5 factors to consider when selecting a hard money lender
If you’re looking for a hard money lender, there are a few things you’ll want to keep in mind. Here are the top 5 factors to consider when selecting a hard money lender:
You’ll want to ensure that the hard money lender you’re considering has a lot of experience. This way, you can be sure that they know what they’re doing and that they’re able to provide the best possible service.
Another essential factor to consider is the reputation of the hard money lender. You’ll want to make sure that they have a good reputation in the industry so that you can be confident in their abilities.
Terms and conditions
When looking at different hard money lenders, be sure to pay attention to the terms and conditions of each one. Be sure that you’re comfortable with the terms before agreeing to anything.
You’ll also want to consider the fees associated with the hard money lender. You’ll want to make sure you’re aware of all the fees before agreeing to anything.
Finally, you’ll want to consider the location of the hard money lender. You’ll want to ensure that they’re located in an area convenient for you.
Hard Money Lenders FAQ
What is a hard money loan?
A hard money loan is a type of short-term loan secured by real estate. Investors typically use hard money loans to purchase and renovate properties.
How much can I borrow with a hard money loan?
Generally speaking, you can expect to borrow up to 70% of the value of the property you’re using as collateral. However, the answer to this question depends on a few factors, including the value of the property you’re using as collateral, your creditworthiness, and the lender’s policies.
So, if you’re using a $100,000 single-family property as collateral, you could potentially borrow up to $70,000. However, if your credit isn’t great or if the lender has stricter policies in place, you may only be able to borrow up to 60% or even 50% of the property’s value.
Of course, you’ll also have to factor in the interest rate when considering how much you can afford to borrow. Hard money loans have higher interest rates when compared to traditional loans, so you’ll need to make sure you can afford the monthly payments.
All in all, how much you can borrow with a hard money loan will depend on a few different factors. However, you can generally expect to borrow up to 70% of the value of the property you’re using as collateral.
What are the benefits of a real estate hard money loan?
A real estate hard money loan can be a fast and easy way to get funding for a real estate investment, like residential real estate. Hard money loans can be used for a variety of purposes, including fix-and-flip projects, refinancing, purchasing foreclosures or purchasing existing property.
What are the risks of a real estate hard money loan?
A real estate hard money loan can be a more expensive option than traditional financing, and there is always the risk that the property could be foreclosed if the loan is not paid back. You may lose all the home equity in the project now be able to cash out your investment.
How much do hard money lenders charge?
Hard money loans generally cost borrowers more than traditional commercial real estate financing, largely due to the unique nature of hard money loans and their borrowers. Most hard money loans have a rate somewhere between 10-18%. This is significantly higher than the average traditional commercial loan, which typically ranges from 2-12%.
How do I refinance a hard money loan?
If you’re thinking about refinancing a hard money loan, there are a few things you’ll need to do to make it happen.
First, you’ll need to find a lender willing to work with you. This may require shopping around a bit but finding a lender willing to give you the best terms possible is crucial.
Once you’ve found a lender, you’ll need to gather some documentation, including things like your loan agreement, proof of income, and any other documentation that the lender requires.
Once you have all of this together, you’ll be able to start the refinancing process.
Get a new loan agreement
The first step in refinancing a hard money loan is to get a new loan agreement. This agreement will outline the terms of your new loan, including the interest rate, repayment schedule, and other pertinent details. Be sure to read over this agreement carefully before signing anything.
Provide loan documents
After you have a new loan agreement, you’ll need to provide the lender with some documentation. These docs will include things like your most recent pay stubs, bank statements, and tax returns. The lender will use this information to determine if you’re a good candidate for refinancing.
Cash your check
If everything looks good, the lender will send you a check for the loan amount. Be sure to deposit this check into your bank account as soon as possible. Once the funds are available, you’ll be able to start making payments on your new loan.
How long are hard money loans?
Hard money loan terms can vary depending on the lender, but they usually range from 6 months to 3 years. Hard money loans are a fantastic option for those who need fast funding and don’t have the time or credit to go through a traditional lender. However, one of the downsides of hard money loans is that they often come with shorter terms than traditional loans.
This can be a problem if you need a longer term loan to finance a project. But it can also be an advantage if you need a quick infusion of cash and can repay the loan quickly. Some lenders may be willing to extend the loan term if you need more time to repay, but you will likely have to pay a higher interest rate.
State-by-state guide to hard money lenders
Joshua Holt is a licensed mortgage loan originator (NMLS #2306824) and founder of Biglaw Investor. His mortgage expertise lies in the areas of professional mortgage loans, particularly for lawyers, doctors and other high-income professionals. Prior to Biglaw Investor, Josh practiced private equity mergers & acquisition law for one of the largest law firms in the country.