Flipping Houses

The Hard Money Loan Funding Process: A Guide for Rehabbers

Expertise: Real Estate Marketing, Personal Development, Real Estate News & Commentary, Mortgages & Creative Financing, Real Estate Investing Basics, Landlording & Rental Properties, Flipping Houses, Personal Finance, Business Management
301 Articles Written
hard money rehab loan

You spot a house that you would like to rehab or flip and decide make an offer. You plan on financing through a hard money lender, but haven't yet done this kind of deal, and wonder what happens after you've got the house under contract. Here's a brief look at the process:

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

All hard money lenders have different requirements. You can learn about these from lenders on the new BiggerPockets hard money lenders directory or by attending your local real estate club meeting and talking with other investors about who they have used to successfully fund their loans.

Some will loan a percentage based on appraised value, while others will loan a percentage based on the purchase price. It is better to find the lenders that will loan on appraised value. The lender will give you a breakdown of your fees along with their terms, including:

  1. Loan Points
  2. Closing Costs (Escrow Fees, Document Fees, Notary Fees)
  3. Interest Amount

A typical lender might say:

I will loan 60% of ARV (appraised repaired value), with 5 points, 500 in document fees and a 6 month interest only balloon payment loan at 10%.

To translate on a deal that appraises at $200,000:
They will loan you up to 60% ($120,000). To get the loan you will pay $6,000 in points + $500 in document fees, and you will pay $1,167.67 on the loan, until you sell the property or until 6 months is up. They will take a trust deed and make you sign the other documents like on a typical mortgage.

Before you present a property, you should get familiar with local lenders and pre-qualify with them. Their lending requirements are often-times different than that of a traditional mortgage lender. Hard money lenders are usually most worried about the amount of cash you have, your level of experience, the specific deal and your credit.

Here’s the typical hard money lending process:

Step 1 – Pre-qualify: talk to the lender and see what they require of you and your deal.

Step 2 – Find and put a good deal under contract.

Step 3 – Call the hard money lender and inform them of what your contract price is, the estimated cost of the repairs, and what you think the ARV value is. Here's a good worksheet to help you out.

Step 4 – The lender will either send their appraiser or give you an approved list of appraisers, and you will then get the property appraised.

Step 5 – They may request some of the escrow documents to verify the paperwork.

Step 6 – They will agree or disagree to fund the loan and will tell you what amount and under what terms it will be.

Step 7 – You close the loan — In many ways, its just like a conventional loan in that you do the closing at a title company or lawyer's office. The lender puts the loan amount into escrow at the title company. The buyer might have to put in money or might get money back, depending on the deal. The title company issues checks as specified on the HUD; typically, a big one to the seller and points back to the lender. If there's cash to the buyer, they would issue that check, too. The title company will ensure that all the proper paperwork is completed in the correct order and that funds are sent to the appropriate people.

Thanks to Steve L. and Jon Holdman for their generous contributions to our real estate forums where this article was compiled from.
Photo: Doug Shick

Joshua Dorkin is a serial entrepreneur, investor, podcaster, publisher, educator, and co-author of
Read more
    Replied about 9 years ago
    great post. good cold hard examples.
    Replied about 9 years ago
    Thank you for your input, however, I am NOT familiar with HOW points work. In this example you cite two things pertaining to points: 1. 5 points 2. $7,000 for those 5 points (if I read this correctly). Just HOW does 5 points in this example equate to $7,000. Or, generically speaking, what-ever the assigned points are, how does one compute that into dollars and cents? Thank you.
    Mike G
    Replied about 9 years ago
    Trisha, one point is one percentage point of the loan amount. So, if the loan was for $100,000, one point would be $1,000, and 2.5 points would be $2,500. In Josh’s example, the loan is for $120,000, so 5 points would be 120,000 X .05, which equals $6000, so I believe he made a small (but confusing) mistake. Unless I’m really misunderstanding something myself.
    Wade Munday
    Replied about 9 years ago
    Trisha, Mike is correct in that 1 point = 1% of the loan amount and 5 points = 5% of the loan amount. In this example, the loan origination fees on a $120,000 loan at 5 points would be $6,000. Also, the monthly payment on a $120,000 loan at 10% interest only would be $1,000. A couple of important points in Josh’s post is to understand your lender’s requirements and be sure you give your lender a complete loan application package. In other words, make it easy for your lender to evaluate your deal and say yes, rather than make your lender work to figure out what you’re not telling them.
    Account Closed from Palm Harbor, Florida
    Replied over 3 years ago
    Wouldn’t the loan payment be $2000 on $120,000, over 6 months? $120,000 x 10% = $12,000 / 6 (months) = $2,000
    Mike G. Rehabber / Flipper from Simi Valley, California
    Replied over 3 years ago
    No, Brett. Using your method, if you paid 12 months of interest you would have: $120,000 X 10% = $12,000 / 12 (months) = $1,000 So you would pay half the interest holding it twice as long? No, instead you calculate the interest per month (which coincidentally is the formula I posted above, so the monthly interest would be $1,000). Then you multiply that amount by the number of months. So for 6 months you would have paid 6 X $1,000 = $6,000.
    Lloyd Dixon
    Replied over 7 years ago
    Good post. I have been spending a lot of time recently looking for more opportunities to invest in hard money loans. Hard money is a great route for flippers, however, investors such as myself find these loans to be a great way to get a secure, solid return on investment. I recently found a company, Money360, that matches together both borrowers and investors looking to get these types of loans done. I registered on their website and have already been notified of a number of investment opportunities that fit exactly what I am looking for. Are there other sites like this? Has anyone tried Money360? So far, I impressed with the amount of investment opportunities and the quality. Finding these opportunities is a constant struggle for me so I am hoping that this site continues to produce the types of opportunities that I have seen so far.
    Gordon Ludolph
    Replied about 4 years ago
    We are looking into forming a hard money lender, but we’ve had difficulty finding samples/templates of both 1. the hard money loan contract to be executed by the real estate investor outlining the terms of the hard money loan. 2. a loan agreement to be executed between the hard money lender and the private lenders, who are interested in providing the seed capital at a set rate of interest. Does anyone have any samples or know of any websites that might have these?
    Jeff Pagano from Jackson, NJ
    Replied over 1 year ago
    I am confused on how he came up with the monthly interest payment. Can someone show me the math on this? I am doing 120,000 x .01= 1,200 —> 1,200 x 5= 6,000 for the points. After that I am lost.
    Kevin Tait from Aurora, Illinois
    Replied over 1 year ago
    Monthly interest only payment = loan balance x (annual interest rate/12) So, 200,000 x (0.10/12) = $1666.67
    Kevin Tait from Aurora, Illinois
    Replied over 1 year ago
    Monthly interest only payment = loan balance x (annual interest rate/12) So, 200,000 x (0.10/12) = $1666.67