Hard Money Loans: Complete Guide for Real Estate Investors
Hard Money Loans: Complete Guide for Real Estate Investors
Traditional bank loans can be slow, rigid, and frustrating—especially when you need to move fast on a deal or your personal finances don't fit the conventional lending box. Hard money loans offer a powerful alternative that prioritizes the property's value over your credit score or tax returns.
Whether you're flipping houses, rehabbing a rental, or need bridge financing to close quickly, hard money loans can be the key to unlocking deals that conventional financing would miss.
What is a Hard Money Loan?
A hard money loan is a short-term, asset-based loan secured by real estate. Unlike traditional mortgages that heavily weigh the borrower's creditworthiness, income, and debt-to-income ratio, hard money lenders primarily focus on the property's value—both its current worth and its potential after-repair value (ARV).
These loans are called "hard money" because they're backed by a "hard" asset: the physical property itself. Private investors, investment groups, or specialized lending companies fund these loans, making decisions based on the deal's profitability rather than your W-2 or tax returns.
Hard money loans typically have terms ranging from 6 to 24 months and are designed to be repaid through refinancing, selling the property, or other exit strategies.
How Does a Hard Money Loan Work?
Hard money lenders evaluate two key metrics to determine how much they'll lend:
Loan-to-Value (LTV) Ratio
LTV = Loan Amount / Current Property Value
Most hard money lenders will loan up to 65-75% of the property's current as-is value. For example:
- Property Value: $200,000
- Maximum Loan (70% LTV): $140,000
Loan-to-After-Repair-Value (ARV)
For fix-and-flip projects, lenders also consider the property's value after renovations:
Loan-to-ARV = (Purchase Price + Rehab Costs) / After-Repair Value
Most lenders cap this at 70-75% ARV. Here's a real example:
- Purchase Price: $150,000
- Rehab Budget: $50,000
- After-Repair Value (ARV): $280,000
- Total Project Cost: $200,000
- Loan-to-ARV: $200,000 / $280,000 = 71.4% ✅
In this scenario, a hard money lender would likely fund the deal since it falls within their 70-75% ARV threshold.
How Funding Works
Most hard money loans are structured as:
- Purchase Funding: Money to buy the property (wired at closing)
- Rehab Draws: Funds released in phases as work is completed and inspected
- Interest Reserve (optional): Some lenders withhold funds to cover monthly interest payments
Common Uses for Hard Money Loans
1. Fix-and-Flip Properties
This is the most common use case. You buy a distressed property, renovate it, and sell it for a profit—all within 6-12 months.
Why Hard Money Works Here:
- Fast closing (7-14 days vs. 30-45 for conventional)
- No income verification needed
- Rehab funds built into the loan
- No prepayment penalties on most flip loans
2. Property Purchases You Already Own (Cash-Out Refinance for Rehab)
If you already own a property that needs significant repairs, you can use a hard money cash-out refinance or rehab loan to fund the renovations.
How It Works:
- You own a rental property worth $250,000 that needs $60,000 in repairs
- A hard money lender offers 70% LTV: $175,000 loan
- You use the cash-out proceeds to fund the rehab
- After repairs, the property is worth $320,000
- You refinance into a conventional loan or DSCR loan at the higher value
Why This Makes Sense:
- Access equity without selling
- Fund major renovations (new roof, HVAC, kitchen/bath remodels)
- Increase property value and rental income
- Avoid high-interest credit cards or personal loans
3. Bridge Financing
Need to close on a new property before selling your current one? Hard money bridges the gap.
Example:
- You find a great investment property that needs a 10-day close
- Your current property is listed but hasn't sold yet
- A hard money loan lets you buy now, then refinance or pay off when your property sells
4. Auction and Foreclosure Purchases
These deals require cash or proof of funds and close in as little as 7-14 days. Hard money is one of the few financing options fast enough to compete.
5. Land Development or New Construction
Some hard money lenders specialize in funding lot purchases and construction projects where traditional banks won't lend.
Pros and Cons of Hard Money Loans
✅ The Pros
- Speed: Close in 7-14 days vs. 30-45+ days with banks
- Flexible Qualification: Bad credit? Self-employed? No problem. The deal matters more than your financial history
- No Income Verification: No tax returns, W-2s, or pay stubs required
- Rehab Funding Included: Get money for both purchase and renovations in one loan
- Asset-Based Lending: If the numbers work on the property, you can get funded
- No Prepayment Penalties (most loans): Pay off early without fees
❌ The Cons
- Higher Interest Rates: Expect 9-15% vs. 6-8% for conventional mortgages
- Points/Origination Fees: Typically 2-5 points (2-5% of loan amount)
- Short Repayment Terms: 6-24 months—you need a clear exit strategy
- Lower LTV: You'll need 25-35% down payment or equity in the deal
- Fees Add Up: Appraisal, inspection, processing, and draw fees can total $3,000-$8,000+
- Risk of Foreclosure: If your project stalls or you can't refinance/sell, you could lose the property
Hard Money Loan Requirements
Requirements vary by lender, but here's what most look for:
| Requirement | Typical Standard |
|---|---|
| Credit Score | 600+ (some lenders accept lower) |
| Down Payment | 25% - 35% |
| LTV Ratio | 65% - 75% of current value |
| Loan-to-ARV | 70% - 75% (for rehab projects) |
| Experience | Some lenders require 1+ completed flip |
| Property Type | Single-family, 2-4 units, some commercial |
| Exit Strategy | Clear plan to repay (sale, refinance, etc.) |
| Rehab Budget | Detailed scope of work and contractor bids |
Hard Money vs. Traditional Mortgages vs. DSCR Loans
| Feature | Traditional Bank Loan | Hard Money Loan | DSCR Loan |
|---|---|---|---|
| Approval Basis | Borrower Credit & Income | Property Value & ARV | Property Cash Flow |
| Closing Speed | 30-45+ days | 7-14 days | 15-30 days |
| Interest Rate | 6-8% | 9-15% | 7-10% |
| Points/Fees | 0-1% | 2-5% | 1-2% |
| Loan Term | 15-30 years | 6-24 months | 30 years |
| Income Verification | Required | Not Required | Not Required |
| Down Payment | 15-25% | 25-35% | 20-25% |
| Best Use Case | Long-term hold | Fix-and-flip, Bridge | Rental properties |
Who Should Use a Hard Money Loan?
Hard money loans are ideal for:
- House Flippers: Investors buying, renovating, and selling properties quickly
- Experienced Investors: Those who understand the costs and risks involved
- Time-Sensitive Buyers: Competing with cash buyers or buying at auction
- Self-Employed/Complex Income: W-2s and tax returns don't reflect your true financial picture
- Rehab Specialists: Property owners who need capital to renovate existing properties
- Bridge Loan Needs: Buying before selling or waiting for long-term financing
Hard money is NOT ideal for:
- First-time homebuyers looking for a primary residence
- Long-term rental holds (use DSCR or conventional instead)
- Investors without a clear exit strategy or experience
The Hard Money Loan Process (Step-by-Step)
1. Find a Property and Run the Numbers
Calculate your potential profit:
- Purchase Price + Rehab + Holding Costs + Loan Costs = Total Investment
- After-Repair Value - Total Investment = Profit
The 70% Rule: Never pay more than 70% of ARV minus rehab costs.
2. Contact Hard Money Lenders
Get pre-qualified with 2-3 lenders. Provide:
- Property address and photos
- Estimated ARV (with comps)
- Scope of work and rehab budget
- Your experience and exit strategy
3. Submit Your Application
You'll need:
- Purchase contract or property ownership proof
- Detailed rehab budget with contractor bids
- Comparable sales (comps) supporting your ARV
- Proof of funds for down payment and reserves
4. Property Appraisal and Inspection
The lender orders an appraisal to verify current value and ARV. They may also inspect the property and review your rehab scope.
5. Loan Approval and Closing
Once approved, you'll close in 7-14 days. Bring your down payment and closing costs (typically 30-40% of purchase price total).
6. Rehab Phase (If Applicable)
Complete work, request draw inspections, and receive rehab funds in stages.
7. Execute Your Exit Strategy
- Sell the property (most common for flips)
- Refinance into a long-term loan (DSCR, conventional)
- Pay off with cash from another source
Costs Breakdown: What to Expect
Let's break down the total cost of a $150,000 hard money loan:
| Cost Item | Amount |
|---|---|
| Interest (12% for 9 months) | $13,500 |
| Origination Points (3%) | $4,500 |
| Appraisal | $500 |
| Processing/Underwriting | $1,000 |
| Draw Inspection Fees (3 @ $150) | $450 |
| Title & Closing Costs | $2,000 |
| Total Loan Costs | $21,950 |
Effective Cost: 14.6% of the loan amount over 9 months
This is why you need a solid profit margin—at least 15-20% return on investment (ROI) to make the deal worthwhile.
Common Mistakes to Avoid
- Underestimating Rehab Costs: Always add a 20% buffer for unexpected issues
- No Exit Strategy: Never take a hard money loan without a clear plan to repay it
- Overpaying for the Property: Stick to the 70% Rule to ensure profit margin
- Ignoring Holding Costs: Property taxes, insurance, utilities, and loan payments add up fast
- Using Hard Money for Long-Term Holds: The high interest will eat your cash flow—refinance ASAP
Frequently Asked Questions
Ready to fund your next flip or rehab project? Hard money loans provide the speed and flexibility to capitalize on time-sensitive opportunities. Contact EDP Realty today to discuss your investment strategy and connect with experienced hard money lenders.
