Asset-Based Lending · Fix-and-Flip · Bridge Financing
Hard Money Loans Explained: How They Work, What They Cost, and When They Are the Right Tool
Hard money loans are short-term, asset-based loans secured by real estate. They fund in days instead of weeks, approve based on property value instead of borrower income, and charge 8% to 15% interest with 1 to 5 points upfront. They are designed for investors and deal-specific scenarios, not primary residence purchases.
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How They Differ
- Approval basis: Hard money lenders evaluate the property and deal — not the borrower’s income, DTI, or employment history
- Speed: Funding in 5 to 14 days versus 30 to 45 days for conventional mortgages — this speed wins competitive deals
- Term: Short-term only — typically 6 to 24 months with no 30-year option
- Action: Only use hard money when speed or deal structure requires it — the cost is 2x to 3x a conventional loan
Typical Terms
- Interest rate: 8% to 15% depending on LTV, property type, borrower experience, and market conditions
- Points: 1 to 5 origination points (1% to 5% of the loan amount) charged upfront at closing
- LTV: Maximum 60% to 75% of the property’s as-is value or after-repair value (ARV) depending on the lender
- Action: Calculate total cost including interest, points, and fees before committing — hard money is expensive financing
Best For
- Fix-and-flip: Investors buying distressed properties to renovate and sell within 6 to 12 months
- Bridge financing: Borrowers who need to close quickly on a purchase before selling their current property
- Auction purchases: Properties sold at auction that require cash or fast closing that conventional lenders cannot accommodate
- Action: Have your exit strategy defined before taking hard money — how and when you will pay it off determines whether the deal works
Risks
- High cost: Interest plus points can total 15% to 25% annually — this erodes profit margins on investment deals quickly
- Short term: If your project takes longer than expected, you may face costly extensions or foreclosure
- Personal guarantee: Most hard money loans require the borrower to personally guarantee the debt beyond the property
- Action: Build 3 to 6 months of buffer into your timeline and budget — construction and renovation projects almost always take longer than planned
Frequently Asked Questions
Can you use a hard money loan for a primary residence?
Do hard money lenders check credit?
How fast can a hard money loan close?
The Bottom Line Up Front
Hard money loans are the most expensive form of real estate financing, but they serve a specific purpose: fast funding based on property value when conventional financing is too slow, too restrictive, or not available. They are a tool for experienced investors, not a substitute for a conventional mortgage.
The cost of hard money — 8% to 15% interest plus 1 to 5 points upfront — makes it financially destructive for long-term holding. But for a fix-and-flip that completes in 6 months, the total cost is a line item in the project budget, not a 30-year commitment. The borrower who profits with hard money is the one who uses it as a bridge: buy fast, renovate fast, sell or refinance into permanent financing fast. The borrower who loses money is the one who takes hard money without a clear exit strategy and gets stuck paying 12% interest for 18 months on a project that should have taken 6.
- Hard money lenders are private individuals or companies that lend their own capital or pooled investor capital — they are not banks and are not subject to the same regulations
- Approval is based primarily on the property’s value and the deal structure — the borrower’s income, DTI, and employment history are secondary or irrelevant
- Typical terms are 6 to 24 months at 8% to 15% interest with 1 to 5 origination points — the total cost is 2x to 3x more expensive than conventional financing
- The exit strategy is the most important part of any hard money deal — you need a defined plan to pay off the loan through sale, refinance, or permanent financing before the term expires
How Do Hard Money Loans Work?
Hard money lenders evaluate the deal, not the borrower. The primary underwriting criteria are the property’s current value, the after-repair value, the borrower’s equity or down payment, and the feasibility of the project plan.
- The borrower presents the property, the purchase price, the renovation budget, and the projected after-repair value (ARV) — the lender evaluates whether the numbers work
- LTV is calculated on either the as-is value (typically 60% to 70% max) or the ARV (typically 65% to 75% max) — the difference determines how much the borrower needs to bring to the table
- Closing happens in 5 to 14 days — the lender orders a quick valuation (not a full appraisal in most cases), reviews the deal terms, and funds
- During the loan term, the borrower makes interest-only payments monthly — there is no amortization, so the full principal balance is due at the end of the term
- At maturity, the borrower must pay off the loan through sale of the property, refinance into conventional or DSCR financing, or by bringing cash
What Does a Hard Money Loan Actually Cost?
The all-in cost includes the interest rate, origination points, and various fees. On a $200,000 hard money loan at 12% for 8 months with 2 points, the total cost is approximately $20,000 in interest plus $4,000 in points — $24,000 total, or 12% of the loan amount.
| Cost Component | Typical Range | On $200K Loan (8 months) |
|---|---|---|
| Interest rate | 8% to 15% | $16,000 to $20,000 |
| Origination points | 1 to 5 points | $2,000 to $10,000 |
| Appraisal/valuation | $500 to $2,000 | $1,000 |
| Legal/doc fees | $500 to $2,000 | $1,000 |
| Extension fee (if needed) | 0.5% to 1% per month | $1,000 to $2,000/month |
| Total estimated cost | $20,000 to $35,000 |
Deal Math
On a fix-and-flip purchased for $200,000 with $50,000 in renovations and a projected ARV of $320,000, the hard money cost of $24,000 represents 7.5% of the ARV. If the deal yields a gross profit of $70,000 ($320,000 ARV minus $250,000 total investment), the hard money cost is 34% of the gross profit. That is expensive financing — but if the alternative is losing the deal to a cash buyer, the cost may be justified by the profit margin.
When Is Hard Money the Right Choice?
Hard money is the right tool when speed, property condition, or borrower circumstances prevent conventional financing and the deal economics justify the cost.
- Fix-and-flip: the most common hard money use case — buy a distressed property below market value, renovate it, and sell within 6 to 12 months at a profit that exceeds the financing cost
- Bridge financing: buying a new property before selling your current one — hard money bridges the gap until the sale proceeds are available to pay off the bridge loan
- Auction and foreclosure purchases: properties that require cash or a fast close that conventional lenders cannot meet — hard money can close in the required timeline
- Properties that do not qualify for conventional financing: distressed, uninhabitable, or non-warrantable properties that fail conventional appraisal or condition requirements
- Borrowers who do not qualify for conventional financing: self-employed borrowers with complex income, borrowers with recent credit events, or foreign nationals with no US credit history
Lender Reality Check
Hard money is not a substitute for conventional financing — it is a bridge to conventional financing or a tool for deals that conventional cannot handle. If you are using hard money because you cannot qualify for a conventional loan on a property you plan to live in, the smarter play is almost always to fix the qualification issue and wait for conventional rather than paying 12% interest on your primary residence.
The Bottom Line
Hard money loans are expensive, short-term, asset-based financing designed for investors and time-sensitive deals. They close fast, approve on property value, and cost 2x to 3x more than conventional financing. Use them only when the deal economics justify the cost and you have a clear exit strategy to pay off the loan within the term.
The key question is not whether hard money is available — it almost always is for the right deal. The question is whether the deal generates enough profit or value to absorb the 10% to 25% annual financing cost. Run the numbers before you sign. Calculate your total cost including interest, points, fees, and potential extension charges. Subtract that from your projected profit or savings. If the math still works, hard money is the right tool. If it does not, find a different deal or a different financing structure.
Frequently Asked Questions
What credit score do you need for a hard money loan?
Most hard money lenders do not have a strict minimum credit score. Borrowers with scores as low as 500 to 550 can qualify if the property and deal structure are strong. Some lenders offer better terms (lower rate, higher LTV) for borrowers with 650+ scores, but credit is not the primary approval factor.
Are hard money loans regulated?
Hard money loans on investment properties are subject to fewer regulations than consumer mortgages. They are not required to comply with TRID, QM rules, or Regulation Z in most cases. Hard money loans on owner-occupied properties are subject to additional consumer protection regulations including state licensing requirements.
Can you refinance out of a hard money loan into a conventional mortgage?
Yes, and this is a common exit strategy. After renovating the property and establishing its improved value, you refinance into a conventional mortgage, DSCR loan, or portfolio loan at a lower rate. The key is timing the refinance before the hard money term expires to avoid costly extensions or default.
What happens if you cannot repay a hard money loan on time?
Most lenders offer term extensions for an additional fee (0.5% to 1% per month). If you cannot extend or repay, the lender can foreclose on the property. Hard money lenders foreclose faster than banks because their own capital is at risk. Having a backup exit plan — a second buyer, a refinance option, or personal funds — is essential.
How do you find hard money lenders?
Local real estate investment groups, real estate attorneys, and mortgage brokers are the best sources. Online platforms also connect borrowers with hard money lenders nationwide. Compare at least 3 lenders on rate, points, LTV, and fees. Reputation and reliability matter — an unreliable lender that fails to fund on time can cost you the deal.
Do hard money loans require a down payment?
Yes. Most hard money lenders require 25% to 40% equity or down payment because they lend at 60% to 75% LTV. On a $200,000 purchase, you would need $50,000 to $80,000 in cash or equity. Some lenders allow cross-collateralization with other properties to reduce the cash requirement.
Is hard money the same as a DSCR loan?
No. DSCR loans qualify based on rental income versus debt payments and are designed for long-term investment property financing (30-year terms available). Hard money qualifies based on property value and is short-term (6 to 24 months). DSCR rates are typically 7% to 9% — significantly cheaper than hard money. DSCR is the refinance exit strategy for many hard money borrowers.
Can you get a hard money loan for land?
Some hard money lenders finance raw land, but LTV ratios are typically lower (40% to 50%) and rates are higher (12% to 18%) because land is harder to sell quickly in a foreclosure scenario. Land with entitlements, utilities, and development potential gets better terms than raw unimproved parcels.