What Is a Hard Money Loan and How Do You Find One?
Published Aug. 1, 2023
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Financing investment properties isn't always easy. If you're trying to buy a home for a fix-and-flip project, acquire a commercial property, or buy a rental property that is in need of extensive repairs, a traditional mortgage might not be possible.
One alternative is to use a hard money loan, which is a special type of financing that is often used by real estate investors with short-term capital needs. Here's a rundown of what a hard money loan is, what they can be most useful for, and where to look for hard money financing for your project.
A hard money loan is a type of real estate loan that is typically short-term in nature and doesn't come from a traditional mortgage lender. In most cases, hard money loans are made by private investors or companies, and are made for the purpose of short-term real estate financing needs.
Hard money loans generally have significantly higher interest rates and fees than traditional mortgages. Interest rates well into the double digits are quite common. On the other hand, hard money loans have more flexible qualifications than other types of financing, and can typically be originated in days, not weeks or months as is the case with traditional financing.
Unlike traditional mortgages and most other types of loans, hard money loans are usually based on the value of the property you're buying, or the after-repaired value (ARV) of a real estate project. To be sure, you may need to agree to a credit check, but hard money loans are generally based on the assets, not the borrower's qualifications.
Hard money loans are also different from traditional mortgages in that they are rarely made with borrowing terms in excess of a few years. For example, you might obtain a hard money loan with a 1-year term for the purpose of buying a dilapidated home and renovating it to sell at a profit.
As mentioned, hard money loans tend to have shorter terms than conventional mortgages, and also typically come with high interest rates and fees. Therefore, they typically aren't the best option in cases where you want to buy a rental property and simply hold it for the long term.
With that in mind, there are some situations where using hard money loans can make sense:
In a nutshell, hard money loans are best suited for situations where you need the money for a relatively short period of time (say, a year or two at most), you have a clear exit strategy, and the numbers still work out in your favor.
A hard money loan is one option for financing investment properties, but as we saw in the previous section, it isn't right for all situations and can be a costly way to borrow. So, before you decide to apply for a hard money loan, there are some other forms of financing you might want to consider first.
One thing new real estate investors often don't understand is that you can use a conventional mortgage to buy an investment property. You'll need to qualify with your credit and income, but you may even be able to count some of the property's expected rent as income. If you can qualify, a conventional mortgage is typically the most economical way to finance an investment property.
There are also long-term mortgages offered by lenders who don't consider your personal income (known as asset-based loans). Before using a hard money loan to finance an investment property, it's usually worth looking into what traditional mortgage options are available.
If you have significant equity -- either in your primary home or another investment property -- you may be able to use that equity to finance your next project.
A home equity line of credit (HELOC) gives you a credit line that is backed by the equity in your home, and you can choose to use as much or as little as you need. There are also home equity loans, which are also referred to as second mortgages and are fixed-amount and fixed-term loans.
There have never been more lenders willing to make unsecured personal loans not based on any particular asset, and these often have better terms than you're likely to find with a hard money loan. One big caveat is that some (but not all) personal loans specifically exclude real estate from an allowable use of the loan proceeds, so you may need to do some shopping around to find one suitable for a real estate project.
Compare various loan features as the apply to each type of financing:
| Hard Money Loans | Traditional Mortgages | HELOCs | Personal Loans | |
|---|---|---|---|---|
| Borrowing limit | Usually 70%-80% of the project cost | As much as 90% of the purchase price (investment properties) | Depends on your home equity | $100,000 with our top personal lenders |
| Income requirement | Usually none; loan is based on the property value | Yes, your income must justify the loan. | Yes, your income must justify the loan. | Yes, your income must justify the loan. |
| Processing time (underwriting) | As little as a few days | Typically 30-45 days | Usually 2-6 weeks | As little as one day |
| Costs/Interest | High interest/high fees | Lowest interest rates and fees | Moderate interest rates and fees | Moderate interest rates and fees |
Since hard money loans are typically made by individual investors or private companies, it isn't as easy as simply finding a list of the top hard money lenders. Some only lend for specific purposes, such as fix-and-flip projects, and some only lend in certain locations. Plus, many don't call themselves hard money lenders -- they use terms like "private direct lenders," "relationship lenders," and more.
With that in mind, one strategy is to join some real estate investing groups on social media or in your local area, or to simply search for "hard money lenders in (your state)." If your real estate agent has lots of experience with investment properties, they can also be a great source.
A hard money loan is a type of real estate loan that is typically short term in nature, is backed by the project it is used to finance (as opposed to the borrower's income) and is generally used for fix-and-flip projects or purchasing commercial properties.
There are a few good reasons why a real estate investor might use a hard money loan. A fix-and-flip project is by far the most popular use of these loans, but they can also make sense as a bridge loan until long-term financing can be obtained. For example, if a property needs too much repair work to qualify for a traditional mortgage, a hard money loan can make sense as a temporary solution while repairs are being completed.
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