What Hard Money Loans Are and How They Work
A hard money loan is a type of asset-based financing secured by real property. Unlike conventional mortgages that evaluate the borrower's income, employment history, and creditworthiness as primary factors, hard money lending focuses on the value of the property being used as collateral and the viability of the investment itself.
These loans are funded by private capital sources including individual investors, private lending funds, and specialized financing companies, not traditional banks or credit unions. They are designed to be short-term instruments with typical terms of 6 to 24 months. The key advantage is speed: most hard money loans close in 7 to 14 days compared to 30 to 60 days for conventional financing. This speed is critical for investors competing in fast-moving markets or bidding at auction.
Hard money is purpose-built for properties that traditional lenders will not touch: distressed homes needing significant renovation, properties in poor condition, or investment deals requiring rapid execution. The underwriting focuses on the deal itself: what is the property worth, what will it be worth after renovation, and what is the borrower's plan to exit the loan.
Who Uses Hard Money Loans
Fix-and-flip investors need fast capital to acquire, renovate, and sell properties within months. Hard money provides the speed and flexibility their business model requires.
BRRRR investors use hard money to fund the acquisition and rehab phases of their buy-rehab-rent-refinance-repeat strategy, then refinance into permanent financing once the property is stabilized.
Bridge borrowers use hard money to purchase a new property before selling an existing one, bridging the gap between transactions.
Auction buyers need guaranteed funding that can close in days, not weeks, to meet strict auction timelines.
Credit-challenged borrowers with profitable deals but imperfect credit histories can access capital that conventional lenders would deny.
Hard Money Loan Terms: What to Expect
Interest rates range from 10% to 15% annually, with 11% to 13% being the most common range for experienced borrowers on clean residential deals. Origination points typically run 1 to 3 points, paid at closing. Loan terms are 6 to 24 months, with 12 months being the standard. LTV ratios range from 65% to 80% of the purchase price, or 65% to 75% of the after-repair value depending on the lender's structure.
Most hard money loans carry interest-only payments with no amortization, keeping monthly costs as low as possible during the hold period. Prepayment penalties are rare, allowing borrowers to exit as soon as their property is ready. Rehab funds are typically disbursed in draws after inspection of completed work.
Compare total cost of capital, not just the interest rate. A 12% loan with 1 point held for 8 months costs less than a 10% loan with 3 points held for 12 months. Calculate the total dollar cost for your specific expected hold period before choosing a lender.
Hard Money vs. Other Loan Types
| Feature | Hard Money | DSCR Loan | Conventional | Private Money |
|---|---|---|---|---|
| Purpose | Acquisition & rehab | Permanent hold | Permanent hold | Flexible |
| Interest Rates | 10% – 15% | 7% – 8.5% | 6% – 7.5% | 8% – 12% |
| Points | 1 – 3 | 0 – 2 | 0 – 1 | 0 – 2 |
| Loan Term | 6 – 24 months | 30-year fixed | 30-year fixed | Negotiable |
| Speed to Close | 7 – 14 days | 21 – 45 days | 30 – 60 days | 1 – 14 days |
| Qualification | Property & deal | Property income | Borrower income | Relationship |
| Documentation | Minimal | Lease, appraisal | Full docs | Minimal |
| Max LTV | 65% – 80% | 75% – 80% | 75% – 80% | Varies |
| Prepayment | Usually none | Often 3-5 year | None | Negotiable |
| Best For | Flips, BRRRR | Rental portfolios | Few properties | Flexible deals |
How to Qualify for a Hard Money Loan
Qualification priorities differ significantly from conventional lending. In order of importance: the property and deal quality matter most (is this a sound investment with clear upside?), followed by your exit strategy (a documented plan to refinance or sell), your experience level (track record of completed projects improves terms), down payment (typically 10-30% of purchase price), credit score (checked but with much less weight, many lenders have 600+ minimums), and reserves (enough capital to complete the rehab and cover carrying costs).
Full Cost Breakdown: What Hard Money Really Costs
Understanding the true all-in cost prevents surprises and informs your exit timing. Consider a $225,000 hard money loan at 12% interest with 2 origination points and a 10-month hold period.
Points at closing: $225,000 times 2% equals $4,500. Monthly interest: $225,000 times 12% divided by 12 equals $2,250 per month. Total interest over 10 months: $22,500. Processing and origination fees: approximately $1,500. Inspection fees across 3 rehab draws: approximately $750. Total cost of hard money: $29,250.
That works out to an effective monthly cost of $2,925. This is why rehab speed and exit timing matter so much. Every month saved is $2,250 kept in your pocket. Use the refinance calculator to see how quickly exiting hard money improves your returns.
See what you save by refinancing out of hard money.
Open the Calculator →Exit Strategies: How to Get Out of Hard Money
Refinance into permanent financing is the primary exit strategy for BRRRR investors and the focus of this site. Replace the hard money with a DSCR loan, conventional mortgage, or portfolio loan. This preserves the asset while dramatically reducing your cost of capital.
Sell the property is the fix-and-flip exit. After renovation, list the property for sale on the open market and pay off the hard money loan from the sale proceeds. Your profit is the difference between the sale price and your total cost basis.
Pay off with cash is uncommon but applicable if you have substantial liquidity and want to own the property free and clear without any permanent debt service.
Red Flags When Choosing a Hard Money Lender
Watch for excessive junk fees buried in fine print that inflate your cost beyond the quoted rate and points. Be cautious of lenders who provide no clear, written fee disclosure before you commit. Mandatory extensions at exorbitant rates (some lenders deliberately profit more from extensions than the original loan) are a serious warning sign.
Always get the complete term sheet in writing before paying any application or appraisal fee. Compare quotes from at least 3 lenders for every deal. Ask specifically and directly about extension terms and fees upfront, as this is where problematic lenders hide their true profit margin. Check for current hard money rate benchmarks to ensure quotes are reasonable.