What Is a Hard Money Loan?: Short-Term Financing for Investment Properties
A hard money loan is a kind of a short-term business loan that’s designed for real estate investment projects. Of course, there’s a lot more to it than just that. Hard money loans have some specific traits (like high interest rates) that you should understand before you get one.
Luckily, you’re in the right place. We’ll explain how hard money loans work, what makes them different from other loans, and what it takes to get one. We’ll also help you decide whether a hard money loan is right for you and where you should get one if it is.
Hard money loans 101
We briefly defined hard money loans above, but let’s unpack that definition a little more.
Hard money loans are a specific type of commercial loan, or a business loan meant for real estate transactions. But unlike other commercial loans, hard money loans are meant for short-term projects, like flipping or rehabbing properties. In some cases, they can also be used for construction.
So while most real estate loans (such as commercial mortgages) come with lengthy repayment terms and low interest rates, hard money loans don’t. In fact, they tend to have very high interest rates and very short loan terms.
For example, you’ll often see commercial mortgages that offer a 5% rate on a 30-year loan. But a typical hard money loan? Think more like 9% interest on a 1-year loan.
Hard money financing goes by a lot of names. You might see a hard money loan referred to as a swing loan, a construction loan, a private money loan, gap financing, or a commercial bridge loan―among other things.
There are a couple reasons for those higher rates and shorter terms.
First, you’re likely getting a loan on an investment property that a traditional lender wouldn’t touch with a 30-foot pole. In order to get a bank loan for real estate, the property usually needs to be in pretty good condition―in other words, bank loans aren’t ideal for flipping. Since hard money loans get used on less-than-ideal properties, the risk is higher for the lender, and the higher interest rates reflect this.
Second, hard money loans are used primarily for flipping properties. Most borrowers plan to pay off the loan as quickly as possible, either through selling the property or through refinancing with a better loan. As a result, hard money loans have very short terms.
That said, hard money loans have some key advantages. Like we mentioned, you can use them to fund properties that most lenders wouldn’t even consider.
And hard money loans usually have much faster funding turnaround times than conventional loans. A commercial mortgage can take weeks to fund, while a hard money loan can get funded in just days.
Still sound interesting? Then let’s dig deeper into the details of hard money loans.
Hard money loan amounts, terms, rates, and fees
As you can imagine, hard money loan amounts, terms, rates, and fees will vary by lender. And your specific loan details will also depend on your borrower qualifications (which we’ll get to in a minute). But we can give you a general idea of what to expect.
Hard money loans have to be large enough to buy real estate with (which is why many alternative business loans won’t work). So most hard money lenders offer loan amounts that go into the millions of dollars.
Not all hard money loans are that large, though. Many hard money lenders offer loan amounts under $100,000. That means that hard money loans can work for projects both big and small.
Keep in mind that a lender will consider a few things when deciding how much money to give you. For example, they’ll probably factor in your creditworthiness and your real estate experience.
They’ll also consider the investment property itself. In fact, hard money lenders base their loan amounts on two numbers: LTV and ARV.
LTV, or loan-to-value, has to do with the current value of a property. A lender will offer loans up to a certain percentage of the property’s non-renovated value, which they’ll describe with an LTV percentage. You’ll commonly see anywhere between 70% and 90%.
So say a lender offers loans up to 90% LTV, and you’re looking at a property that’s currently worth $100,000. The largest loan that the lender will give you is $90,000.
ARV, or after repair value, covers how much the property will be worth after it’s flipped. As with LTV, lenders will give you a percentage up to this value. Usually, though, they offer a lower ARV than LTV. We’ve seen ARV ranges between 60% and 80%.
For example, imagine you’re buying a property that’s currently worth $100,000. With some renovations, you think you can increase that to $150,000. A lender that offers up to 70% ARV will give you (at most) $105,000.
Note that some lenders use both of these to figure out loan amounts, while others prefer one or the other.
We’ve already told you that hard money financing comes with shorter repayment terms than you’d get with conventional financing. But how short is short?
Well, a 12-month term would be pretty standard. But in our research, we saw hard money lenders offer anywhere between 1-month and 36-month terms.
Some lenders offer quite a wide range (like 3 to 36 months), while other lenders keep it simple with one specific term (like 12 months).
Note that hard money loans aren’t fully amortizing. That means that if you simply make your monthly payment as scheduled, you won’t pay off your loan balance at the end of the term―instead, you’ll be left with a large balloon payment. This is deliberate, since lenders expect you to pay off your loan ASAP by selling or refinancing.
Generally speaking, commercial real estate loan rates are lower than the rates on other types of business loans. Hard money loans, though, are an exception.
As we mentioned earlier, hard money loans usually represent a higher risk for the lender. (That’s why you can’t get one from any old traditional lender.) That risk gets passed onto you in the form of higher interest rates.
The lowest starting rate we’ve seen on a hard money loan is about 5.5%, but hard money loan rates starting at 8% or 9% are more common. And remember, those are just starting rates. Your personal interest rate will depend on your creditworthiness and other factors.
Put bluntly, you shouldn’t be surprised if you end up paying double-digit interest rates.
It’s easy to confuse APR (annual percentage rate) and interest rates, but APR accounts for both your interest and your fees. Our guide to APR explains more.
Remember, you’ll pay more than just interest. Most business loans have some fees, and hard money loans are no exception.
Expect to pay an origination fee and closing costs (including an appraisal fee, title fees, and other associated fees) on your hard money loan.
One fee to watch out for? A prepayment penalty. Remember, hard money loans are designed to be paid off quickly. Some hard money lenders charge prepayment penalties anyway. So before you get a loan, you should make sure that you understand the costs associated with prepaying.
Is hard money financing right for you?
At this point, you know a lot about hard money loans. But how do you decide if a hard money loan is the best financing solution for you?
First, you should consider how you plan to use your loan. Remember, hard money loans work best for short-term real estate financing needs, like flipping properties (and sometimes construction). They are not a substitute for other types of commercial loans. In other words, you shouldn’t try to get a hard money loan simply because you can’t qualify for a lower-interest real estate loan.
Second, you should have a firm plan in place for your renovation. You don’t want to get a hard money loan and then waste weeks of the already short term trying to figure out how to flip the property.
You should also have a plan for the loan itself. Otherwise, you might get to the end of the loan term and find yourself saddled with a huge balloon payment. So if your plan is to sell the property and use the profits to repay the loan, you should probably make sure the real estate market in your area is healthy. And if you plan to refinance the loan, you should be positive that you can qualify for the best commercial real estate loans.
And of course, before you start applying for hard money loans, you should be reasonably confident that you can qualify to get one in the first place.
Qualifying for a hard money loan
Every hard money lender has its own borrower requirements. They all look at similar factors, though:
- Your personal credit score
- The property’s current value
- The property’s potential value
- Your personal income
- Other liquid assets you have
- Your flipping experience/track record
Again, the specific requirements can vary a lot from lender to lender. But of course, if you have a high credit score, tons of experience flipping properties, and a high personal income, you’ll have an easier time getting approved.
Your personal credit score can help give you a general idea of whether or not you’ll get approved. Most hard money lenders look for a credit score of at least 600, or fair credit. It’s not impossible to get approved with a lower credit score, but you’ll have a much harder time getting approved with bad credit.
We also want to note that almost all hard money lenders require you to have an official business (whether it’s an LLC, corporation, or something else). They don’t lend to individuals.
Where to get a hard money loan
So now you’re sure you want a hard money loan, and you're ready to submit a loan application. What lender should you apply with? As we mentioned above, hard money loans aren’t like other types of commercial loans―you can’t get a hard money loan from any old institutional lender.
Instead, you’ll need to look for either a private lender or a specialized hard money lending company. These lenders often offer financing in only some states, so you might have to do some digging to find a hard money lender that offers a loan program in your area.
That said, we’ve rounded up some of our favorite hard money lenders.
Min./max. loan amount
Lowest listed rate
Get a loan
100% LTV/75% ARV
90% LTV/75% ARV
Residential Capital Partners
Data as of 6/29/22. Offers and availability may vary by location and are subject to change.
You can learn more about these lending companies (and some others) in our rankings of the best hard money lenders.
A hard money loan can work well for short-term real estate projects. It lets you fund rehab and construction projects that you could never get a traditional loan for (and it lets you get funding faster too).
Just remember that you should expect a higher interest rate and a shorter loan term that you'd get with traditional financing. So before you submit your loan application, make sure you've got a plan in place for repaying the loan―whether that's by selling the property or refinancing.
Plan to refinance your hard money loan? Make sure you’re ready by learning how to refinance business loans.
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