Hard Money Lending

Discover how to use hard money loans.

Hard money loans may not be difficult to get, but they can be expensive. Despite the cost, they’re an essential tool for investors. Knowing when to use hard money and how to get it is critical.

Here’s everything you need to know about using hard money loans for real estate.

What is a Hard Money Loan?

Hard money loans use real assets as collateral instead of relying on the borrower’s financial history. Typically the property you’re buying is used as collateral, but other examples include retirement accounts or other real estate properties you own.

Hard money loans are a way to borrow money without jumping through the hoops of traditional lenders. They often have more flexible terms than loans provided by conventional banks because private lenders offer them.

How Does a Hard Money Loan Work?

As opposed to a traditional lender, a hard money lender is much more interested in the asset than the borrower who’s borrowing against that asset. And thus, as you might expect, a hard money loan is usually quite a bit more expensive than a standard bank loan.

Banks normally have very strict and arduous criteria for traditional mortgages, especially mortgages on an investment property. This is particularly true once you’ve acquired over ten properties in your name and are no longer eligible for a Fannie Mae–backed loan.

When it comes to owner-occupied properties, the type of loan that banks are interested in is of the cookie-cutter variety. However, most real estate investors don’t make money with cookie-cutter properties, so hard money lending can be extremely useful.

While the hardest money is lent out for investment property and residential property, hard money lenders offer loans on multifamily apartments, commercial office buildings, industrial property, retail, and even on items that aren’t real estate investments, such as equipment purchases.

At first glance, hard money and private money loans appear to be the same, but they are quite different.

Hard money lenders are effective brokers for short-term loans, mostly on real estate.

Private lenders, on the other hand, can be just about anyone who has money. A private loan is relationship-based; the lender could be a private company, friend, or family member.

Many investors use hard money as an integral part of their financing strategy—particularly those who need loans to fix and flip. It’s a great tool to get money quickly if you know how to use it in the right way.

Hard Money Lending and Real Estate

As noted above, the standard terms for hard money loans are expensive and can come with higher interest rates. But since these are short-term loans, they can still be absorbed with room for a healthy profit. While each hard money lender is different, normally, real estate loan terms look like this.

• Loan to value/loan to cost 65%–85%.
• Lend on rehab costs: yes.
• Interest rate: 12%–16%.
• Points: 2-6.
• Other fees (will vary by lender):
• Appraisal/broker’s price opinion.
• Title fees.
• Application fee.
• Inspection fee.
• Document processing fees.
• Term: six months to one year.
• Prepayment penalty: usually none.

But the loan amount ranges widely from lender to lender. For example, Taryn Kendrick, president and co-owner of Kansas City-based Worcester Financial, notes that while they do not charge an application fee or document processing fees, many lenders do. A broker’s price opinion (BPO) usually ranges from $150 to $250, and an appraisal can range from $400 to $650 (or substantially more if it’s a multifamily or commercial property).

The loan amount also depends on the value of the property. Indeed, while Worcester Financial goes up to 75% of the loan-to-value (LTV) or loan-to-cost (LTC), they are willing to loan up to 65% of the after-repair value (ARV) if that value is higher.

This means that on rare occasions, they have financed 100% of the cost of the property. This only happens for particularly good deals, however. Don’t go into a deal expecting this.

And, to reiterate, what each hard money lender is willing to do is different. Some, for instance, may be willing to use other assets (say, another property) to “cross-collateralize” a loan. This type of flexibility is another advantage of hard money lending.

Other hard money lenders may max out at 65% LTV, while some may increase to 85%. Remember to clarify whether a lender is referring to the LTV (what the property is worth) or the LTC (how much money you will be putting into the property).

Regardless, you will almost always need to find a way to raise the down payment. Potential sources include savings, a partnership, or a personal loan from friends or family. In certain cases and with some lenders, another free and clear property can be cross-collateralized.

The bottom line is that hard money lenders are generally more flexible than banks. Real estate investors have a better chance of negotiating adjustments to the terms or repayment schedule with a hard money lender than they would with a bank.

What To Know About Hard Money Lenders

As with any business, you must be careful about hard money lenders. The key thing is to vet them in the same way you would any other key team member. They will certainly be vetting you.

You will also need to consider your situation to find the best hard money lender for your needs. Is this your first property? Or are you an experienced flipper? Are you looking for someone focused on your needs? Someone fast? Which money lenders can you afford? Which hard money lender has the best reputation in your area?

These are some of the questions you should ask yourself when looking for a lender.

Don’t be afraid to ask for referrals, either. Good lenders won’t have a problem providing them.

Pros and Cons of a Hard Money Loan

Given that hard money lenders are more expensive than banks; it makes sense to go the hard money lending route if you can’t get a bank loan upfront. Traditional purchases or properties that don’t need much rehab are not the best candidates for hard money loans.

On the other hand, properties that you intend to flip or need substantial rehab are good candidates for hard money lending. This is particularly true if you have some hiccups on your credit report or don’t have a W-2 income.

Banks are obsessed with W-2 income. While many will lend to full-time real estate investors, many will not—at least not to anyone without a long, proven track record, which newer investors obviously don’t have yet.

The pros and cons of hard money loans depend on your situation, but let’s go through them:

Hard money loan pros

• They’re quick.
• The loan review isn’t as arduous as with banks.
• Borrowers who can’t get a conventional loan often qualify.
• Properties that need too much work for a bank to be interested in often qualify.
• They’re available if a traditional loan falls through while the property is under contract.

Hard money loan cons

• The cost of the loan can be expensive, with high-interest rates and miscellaneous fees.
• They’re risky to jump into since your property is collateral.
• Repayment periods are shorter.
• Some hard money lenders are after your money—and lots of it.

Alternatives to Hard Money Loans

If you’re unsure about hard money lending and its associated risks, you might be wondering if there are any alternatives to hard money loans for investors. There are several other options you can consider if you don’t want to work with a hard money lender, including:

Home equity line of credit (HELOC)

With a HELOC, you can use the equity you have in your home as a line of credit without actually having to pull the equity out of your home. You’ll borrow against the equity you’ve built up, turning your asset into collateral that you can use to invest in another property. Of course, doing this means you’ll have a lien against your home, but you’ll pay this down over time and hopefully make money off your investment in the meantime.

Cash-out refinance

A cash-out refinance when you actually pull out the equity you’ve built up in your home and use it to purchase an asset. It’s basically taking out another mortgage or increasing the mortgage you already have on your home. This can be a good move if you don’t owe much on your home or the interest rates are better at the time you want to refinance and pull cash out of your home’s equity. There are fees associated with a cash-out refinance, which will increase your monthly mortgage payment, so consult an adviser to ensure this is the right move for you. 

Home equity investment products

Home equity investment products are another alternative to hard money lending. These products also allow you to use the equity you’ve acquired in your home, but you won’t have to worry about paying the money back right away. This gives you flexibility with your investment plan. You can often get the money you need quickly when you opt to use a home equity investment product.

Family or friends

Family and friends with extra cash may be willing to loan you money to purchase a real estate investment property. If you’re a first-time investor, this can be an especially appealing route, as you can negotiate the best terms for you. A friend or family member may be more willing to work around your investment needs and be more lenient with payback terms and conditions. It’s likely that you can get a better interest rate from friends and family than you can from a traditional lender or one who offers hard money loans.

How To Get a Hard Money Loan

For private investors, the best part of getting a hard money loan is that it is simpler than getting a traditional mortgage from a bank. The approval process is generally much less intense. Banks can ask for an almost endless series of documents and take several weeks to months to get a loan approved. Most hard money lenders can close a loan in only five to 10 business days.

It is generally best to start building relationships with hard money lenders before you start making offers. This increases the likelihood of getting a deal done, as much of the groundwork has been laid before you need the money.

Many hard money lenders will also provide a conditional approval letter, which acts similarly to a bank’s preapproval letter. Most sellers require it before they’ll sign on the dotted line.

Hard money lenders still have a loan application form to fill out. They also generally request two years of tax returns, two months’ worth of bank statements, a schedule of your own real estate, a copy of your driver’s license, and other personal information. They’ll look at your credit score too.

That said, there isn’t nearly as much paperwork or detail as there is with a traditional loan. The main purpose is to make sure the borrower has an exit strategy and isn’t in financial ruin. But many hard money lenders will work with people who don’t have great credit, as this isn’t their biggest concern.

The most important thing hard money lenders will look at is the investment property itself. Hard money lenders will request a BPO or an appraisal to assess the property’s current as-is value or determine the ARV.

They will also evaluate the borrower’s scope of work and budget to ensure it’s realistic. Sometimes, they will stop the process because they either believe the property is too far gone or the rehab budget is unrealistic.

Finally, they will evaluate the BPO or appraisal and the sales and/or rental comps to ensure they agree with the evaluation.

So it’s not as simple as filling out a form and pulling out money. But there is another advantage built into this process: You get a second set of eyes on your deal and one that is materially invested in the project’s outcome at that!

If a deal is bad, you can be fairly confident that a hard money lender won’t touch it. However, you should never use that as an excuse to forgo your own due diligence.

It’s also important to note the occasional bad apple in the hard money lending realm is out there (just like every other industry), so make sure you find a reputable lender who you can trust. The best place to look for hard money lenders is in the BiggerPockets Hard Money Lender Directory or your local Real Estate Investors Association. Remember, if they’ve done right by another investor, they are likely to do right by you.

How Much do Hard Money Lenders Charge?

As noted above, the standard terms for hard money loans are expensive. But since these are short-term loans, they can still be absorbed with room for a healthy profit. While each hard money lender differs, normal loan terms look like this.

• Loan to value/loan to cost: 65%–85%
• Lend on rehab costs: Yes
• Interest rate: 12%–16%
• Points: 2-6
• Other fees (will vary by lender):
• Appraisal/broker’s price opinion
• Title fees
• Application fee
• Inspection fee
• Document processing fees
• Term: 6 months to 1 year
• Prepayment penalty: Usually none

Still, the loan amount ranges widely from lender to lender. For example, Taryn Kendrick, president and co-owner of Kansas City-based Worcester Financial, notes that while they do not charge an application fee or document processing fees, many lenders do. A broker’s price opinion (BPO) usually ranges from $150 to $250, and an appraisal can range from $400 to $650 (or substantially more if it’s a multifamily or commercial property).

The loan amount ranges widely from lender to lender and depends on the value of the property. Indeed, while Worcester Financial goes up to 75% of the loan-to-value (LTV) or loan-to-cost (LTC), they are willing to loan up to 65% of the after-repair value (ARV) if that value is higher.

This means that on rare occasions, they have financed 100% of the cost of the property. This only happens for particularly good deals, however. Don’t go into a deal expecting this.

And to reiterate, what each hard money lender is willing to do is different. Some, for instance, may be willing to use other assets (say, another property) to “cross-collateralize” a loan. This type of flexibility is another advantage of hard money lenders.

Other hard money lenders may max out at 65% LTV, while some may increase to 85%. Remember to clarify whether a lender is referring to the LTV (what the property is worth) or the LTC (how much money you will be putting into the property).

Regardless, you will almost always need to find a way to raise the down payment. Potential sources include savings, a partnership, or a personal loan from friends or family. With some lenders, another free and clear property can be cross-collateralized in certain cases.

The bottom line is that hard money lenders are generally more flexible than banks. Applicants have a better chance of negotiating adjustments to the terms or repayment schedule with a hard money lender than they would with a bank.

How to Get Approved for a Hard Money Loan

For private investors, the best part of getting a hard money loan is that it is simpler than getting a traditional mortgage from a bank. The approval process is generally much simpler. Banks can ask for an almost endless series of documents and can take several weeks to months to actually get a loan to the committee. Most hard money lenders can close a loan in only five to 10 business days.

It is generally best to start building relationships with hard money lenders before you start making offers. This increases the likelihood of getting a deal done, as much of the groundwork has been laid before you need the money (ASAP!).

Many hard money lenders will also provide a conditional approval letter, which acts similarly to a bank’s pre-approval letter and which many sellers require to sign on the dotted line.

Hard money lenders still have a loan application form to fill out. They also generally still request two years of tax returns, two months’ worth of bank statements, a schedule of the real estate you own, a copy of your driver’s license, and other such things. They look at your credit score too.

That said, there isn’t nearly as much paperwork or detail as with a traditional loan. These things’ main purpose is to ensure the borrower has an exit strategy and isn’t in financial ruin. But many hard money lenders will work with people who don’t have great credit.

The most important thing hard money lenders will look at is the property itself. Hard money lenders will request a BPO or an appraisal to assess the property’s current as-is value or determine the ARV.

They will also evaluate the borrower’s scope of work and budget to ensure it’s realistic. Sometimes, they will stop the process because they either believe the property is too far gone or the rehab budget is unrealistic.

Finally, they will evaluate the BPO or appraisal and the sales and/or rental comps to ensure they agree with the evaluation.

So, it’s not as simple as filling out a form and pulling out money. But still, there is another advantage built into this process: You get a second set of eyes on your deal and one that is materially invested in the project’s outcome at that!

If a deal is bad, you can be fairly confident that a hard money lender won’t touch it. However, you should never use that as an excuse to forgo your own due diligence.

It’s also important to note the occasional bad apple among the hard money lenders out there (just like every other industry), which we will discuss how to avoid below.

Who is the Best Hard Money Lender?

As with any business, you must be careful about hard money lenders. The key thing is to vet them in the same way you would any other key team member. (They will certainly be vetting you.)

You will also need to consider your situation to find the best hard money lender for you. Is this your first property, or are you an experienced flipper? Are you looking for someone focused on your needs? Someone fast? Which money lenders can you afford? Which hard money lender has the best reputation in your area?

These are some of the questions you should ask yourself when looking for a lender.

Don’t be afraid to ask for referrals, either. Good lenders won’t have a problem providing them.

The best place to look for hard money lenders is in the BiggerPockets Hard Money Lender Directory or your local Real Estate Investors Association. Remember, if they’ve done right by another investor, they are likely to do right by you.