What is a Hard Money Loan? Everything to Know


There are several types of loans, but what is a hard money loan? This guide explains everything to know about hard money loans.

Every year sees a total sales value of about $650 billion from house flipping. Still, the biggest hurdle most people face when starting a house flipping business is a lack of capital.

If you have been looking to get into house flipping and reap the massive benefits it comes with, how do you immerse yourself in the market without money?

Cue, hard money loans. What is a hard money loan? Why do they sound like bad loans with some underworld connotations like you’re just getting yourself into big trouble when getting into one?

Hard money loans have had a bad name for a while now, and it’s understandable if you haven’t considered it as an option. This guide will explore what hard money loans are and help you understand whether you should take one.

What Is a Hard Money Loan?

The thing is, they are known as hard money loans because the “hard” stands for the asset. However, these are legitimate loan options from lenders looking to fund legitimate projects.

Essentially, when you take a hard money loan, you have to back it up with collateral. In this case, the real estate property you’re looking to invest in.

Hard money lenders are private individuals or institutions that provide short-term real estate loans. They not only work with house flippers but also developers and private investors in both residential and commercial real estate markets.

They fund all types of properties, from condos to apartment buildings, single-family homes. Mostly, they fund properties in dire need of renovations, repairs, or stabilization that increase the property value, and they make money through interests, fees, and points.

How Are Hard Money Loans Different From Traditional Bank Loans?

One of the most significant differences is that hard money loans are a bit more expensive.

Hard money lenders are always more interested in the collateral asset than in the borrower taking the money against the assets. However, hard money loans are also easier to qualify for because the added expense makes them easily accessible.

You’re also likely to get a more flexible repayment plan and a less stringent approval process. Most banks have very strict criteria and arduous approval processes, especially for property loans.

Hard money loans are also approved faster, but they happen to be short-term loans that don’t last as long as conventional mortgages.

The approval process also varies significantly. Banks are more concerned about your personal debts and your credit score, while hard money lenders may be more interested in your property, project economics, or even experience in the real estate market.

The loan amount it’s based on two things, which are the loan-to-cost ratio, and the loan-to-value ratio.

Loan-To-Cost Ration: Loan-to-cost ratio (LTC) involves the total cost of the project, from the purchase price to the rehab cost. Usually, you’d get anything from 70 to 100% of the project cost.

Loan-To-Value Ratio: On the other hand, the loan-to-value ratio (LTV) involves the percentage of ARV or after repair value. This essentially means the market value of the property once you’re done renovating it. Most money lenders offer anything between 65 to 75% of a loan-to-value ratio.

How to Get a Hard Money Loan

The hard money loan process starts with the borrower applying for a loan.

Once you find a suitable property that has a good offer value in return, you find the best portable hard money lender and fill out an intake form and Uniform Residential Loan Application. These will provide information about the project and demonstrate your track record and experience in the real estate market.

The lender will underwrite the loan, which essentially means evaluating risk. They will check your credit reports, evaluate your ability to pay the loan if the deal doesn’t go through, review the scope of work, and order an appraisal on the property. Once the process is over, they will either approve or deny you alone.

If you get approval, you’ll wait for the closing date when you’ll sign documents such as promissory notes and deeds of trust. These are meant to secure the lenders’ investments by placing a lien on the property. Case in point, if you fail to abide by the proposed terms, the lender will claim the property to recoup that investment.

Once you get the money and start on your project, you’ll have to pay interest, fees, and points to the lender. Some people make all hard money loans “Hard Money” because hard money loan rates can be quite hard to believe. One point is equal to 1% of the loan and is usually paid upfronts, but the interest rates are paid on a monthly basis.

Requirements for a Hard Money Loan

You already know that qualifying for a hard money loan doesn’t necessarily depend on your credit score. So, what are the hard money loan requirements? The first thing you need is the down payment or equity in the property.

In general, hard money lenders ask for 25-30% for residential properties and 30-40% for commercial properties. You may also be able to use cross-collateralizing, which means using multiple properties to get a loan. The lender may also require you to have the financial strength to make monthly loan payments and an exit strategy.

Typical Hard Money Loan Rates

Various factors determine hard money loan rates, including the location of the property, type of property, loan term, and borrowers’ experience. Excellent hard money loan rates go from 6-8%, good rates 8-10%, standard rates 10-12%, expensive but acceptable rates 12-14%, and very expensive rates over 14%.

Pros of a Hard Money Loan

There are several benefits that come with hard money business loans, some of which include fast qualification and clear loan terms. Beyond that, they have a minimal underwriting process, quick approval rate, flexible repayment plans, and a thorough analysis of the details involved.

Cons of a Hard Money Loan

With benefits come disadvantages as well. Some hard money loan disadvantages include high-interest rates, appraisal requirements, significant points and fees, and the fact that they are short-term.

How to Find Hard Money Lenders

To find a hard money lender, you first need to clarify your expectations. Consider how much down payment you’re willing to put in, your preferred loan duration, when you intend to sell the property, who you’ll hire for the renovations, and how much work you’re personally willing to put into it.

Once you know what you want, one of the best ways to search for a lender is through the internet. Of course, you can always ask for recommendations from your friends and family, as well as other real estate investors in your area.

One of the most important things you should do is pick a lender that’s transparent with the loan terms. If the rates they advertised are different from what they actually offer, it would be prudent to move on to another lender. They should be licensed in your state and need to have a proven track record in offering hard money loans.

It’s also essential that you find a lender with you can build a long-term relationship. Even if this is your first time investing in a real estate property, it could be one of many you’ll buy in the future. Having a lender that you can rely on in the future can be a differentiating factor.

Even though the hard money lending process sounds similar, different lenders will have different expectations of the money they give out.

A reputable company will give you clear terms from the word go and tell you what they expect from you for the duration of your loan. All your details should be in writing, and you need to verify that they’ll not change throughout the loan term.

100 Hard Money Loans vs. Owner Occupied Hard Money Loans

The 100 hard money loans are 100% of the loan you apply for without a down payment. Lenders absorb greater risk if the amount needed is lower than the loan-to-value requirement. However, interest rates are higher with these loans, you get additional points, and you may have to front the first construction draw.

Owner occupied hard money loans are offered when borrowers intend to occupy the property. These are rarer because a lot of people don’t understand how they work. Hard money lenders provide these loans as long as they’re not for personal or family use but for business purposes.

What is a Hard Money Loan? The Ultimate Guide

What is a hard money loan?

We hope that our ultimate hard money loan guide has answered this question. We also hope that now you understand what to look for in a hard money lender and what to expect during the hard money lending process. We hope you’ve gained enough insight to make informed decisions about your real estate endeavors.

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