Hard Money: What Is It and How Do Hard Money Loans Work?

by | BiggerPockets.com

Most real estate investors hear terms that they don’t understand in the beginning. One of these terms, hard money, is little understood, and frequently asked about. Here is a great explanation of hard money.

What Does Everyone Mean by Hard Money? What is Hard Money

Hard money lenders (HMLs) are typically private individuals or small groups that lend money (Hard money) based on the property you are buying, and not on your credit score. Usually these loans cost (percentage-wise) much more then an average mortgage, often times up to twice what a regular mortgage does, plus high origination fees.

Who Needs Hard Money

Developers and house flippers, amongst others, will use it to fund deals because you can often borrow up to 100% of your purchase price! On the other hand, hard money lenders will frequently require you to back up your loan with real assets. If you know you can buy a property and turn it quickly at huge profit, and you can’t get a standard mortgage, it might be one way to go. Some investors use hard money to get into the property, do some quick fixes to raise the property value, then get a new loan (based on the property’s new, improved value) from a bank to pay off the hard money lender.

In Other Words . . .

Hard money loans are easily accessed and cut through the red tape. If you can develop a relationship with a LOCAL hard money lender, you can get funds within a couple days, and sometimes with no appraisal or other costs (except for origination fees of course).

Now different HML’s have different requirements and protocol. There is a local HML that only charges 12% interest and 1 point origination if you keep it over a year and 2 more points if you keep it less than a year. He only does 30 year notes, and obviously he wants you to keep it. He has over 1100 notes, so he doesn’t want the hassle. He wants his money to stay loaned out. I have also worked with another local HML who doesn’t charge any points, but he’s extremely fickle and can be hard to work with.

Now the typical HML will charge somewhere right around the usury rate. In Texas its 18% annual, so most HML’s will charge 5% origination and 13% interest on a 1 year note or no points upfront and 18% interest with a shorter call. Now they can get around usuary by shifting their origination fee into a commitment fee (little different protocol), but most HML’s don’t know this.

The beauty of HML’s is that the loan is normally not based on your credit score (especially with local lenders) or at least not on your credit worthiness (assets and income), you can receive funding within a matter of days (normally about 7-14 days) rather than 30 days+, and you can get a loan on any piece of junk that you find. You also are not normally dealing with a processing team. You deal directly with an individual lender. If he or she says yes, then you have the loan. This is quite advantageous versus going through an entire loan committee process or underwriting process.

HML’s on longer term investments are not a good idea, but for short term flips, rehabs, or for the initial purchase, they can be a very strong tool. I started my investing using HML’s, and have made very good money using them. I now use mostly a line of credit from the bank, but it took me several years to work into that. I also now do some local hard money loans to other investors.


Thanks to Ryan Webber for his explanation “in other words” (from our forums)

About Author

Joshua Dorkin

Joshua Dorkin is a serial entrepreneur, investor, podcaster, publisher, educator, and co-author of How to Invest in Real Estate. He started BiggerPockets to help democratize the real estate investing landscape for himself and others, aiming to make it accessible for everyone, regardless of income or education. Today, BiggerPockets is the premier real estate investing website online with over one million members and reaching over 70 million people with the message of financial freedom through real estate investing. Joshua, along with his wife and three daughters, make their home in Denver, Colorado, and spend any time they can traveling, exploring, and adventuring. Read more about Joshua’s story in 5280 and Inc.com.


  1. I agree with Ed. The flipping days are long gone. If you speak to flippers in todays market the song they are singing is ‘Buy Low, sell even LOWER’. I don’t know about you, but flipping in this market doesn’t make a lot of sense. Now is the time to buy and hold.

  2. There are many types of hard money loans, if you’re not sure if hard money loans is the right way for you to go try to understand first what is hard money loans?
    You can go to my website of course any time to read more about had money lending.
    Most loans are done for investment properties non owner occupied.
    So if you’re looking for a commercial or residential hard money deal you have to know that the interest rates are higher than conventional lending and the points are like 5 at least for each loan you will apply for.
    Let me know if you need more help.
    Yanni Raz

    • We’re waiting for estate probate account to release monies. We are living in a home that we will purchase. Owner has allowed us to rent until then. If anything is taken from account we will not have all the monies for purchase. If needed 40-60,000 HML how will that work? How much upfront monies needed and monthly payment. Total home is 95,000 and at time of monies released we will have 35000 cash . How can u help. Would this be a good idea?

  3. Don’t be confused, though, hard money loans are not a simple alternative for those with poor credit. Even private investors aren’t interested in a borrower with a history of bankruptcy or non payment. In addition, the closing costs on a hard money loan must be paid up front. These fees could be a couple hundred dollars or a couple thousand, making the hard money loan a non choice for most borrowers in distressed situations. If you fit into one of the unique scenarios that would benefit from a hard loan, do your research before signing any papers. Get recommendations on the private lender when you can. With no bank regulations on private lending the only one who can separate a legitimate lender from a loan shark is you.

  4. Thanks for the article, was very informative.
    One of the strategies you mention included making a loan to get in the door. Then refinancing to get out of it. In this scenario, is the first payment on the HML due in 30 days or is there time given to make rehab changes rent or re-finance?

  5. I live in Studio City, CA and have just pre-qualified for a $260 loan with $70k down on a condo.
    Two questions:
    1). I would MUCH rather work with a hard money lender but don’t know any in Studio City. Do they advertise locally? or would HML’s in other cities or states lend money?
    2.) Do they loan money for condo rehabs?

    Wonderful article! Thank you for taking the time to write it.

  6. Andrea Heintzelman

    This article on “who is a hard money lender” was excellent and as you stated, a subject that has been little understood or written about. As I would like to become a “hard money or private money lender”, I still have questions not answered in your article. Some of these questions are: (1) as a lender, do I need to have a Trust Deed written by a real estate lawyer in the State where the borrower’s property is located or can I have it done in my home State; (2) is the borrower responsible for paying for the Trust Deed we both sign; (3) what information do I need to know about the borrower; and (4) what criteria must be part of the Trust Deed to protect my interests?

  7. Just to make sure I am understanding correctly. Hard money loans are just loans taken from private individuals or institutions. They are also collateral loans that ensure the lender will not lose anything on his investment, correct?

  8. Elena Michelson

    Hard money loans are great for fix and flippers as they help with both financing and rennovating the property. Anyone that is looking to get into this market should consider this loan and learn more about how they can take advantage of this oppotunity presented to them.

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