Mortgages & Creative Financing

Everything to Know About Hard Money Loans—Straight From the Lender’s Mouth

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hard money-loan

You may have heard of hard money lending. However, most of the people who walk through my office don’t know why or how these loans are able to be secured and distributed so quickly.

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This article will cover the details of why and how hard money loans work, with insights from a lender.

What Is a Hard Money Loan?

Hard money lending refers to short-term loans funded by private investors that are secured through real estate.

Unlike hard money, banks and credit unions that fund traditional (or “soft”) loans collect extensive information about the borrower to determine if they qualify. Such checks may include detailed credit history, credit score, criminal and personal background, and even rental history.

Banks require quantitative data that provides enough evidence to conclude that the likelihood of the loan being paid off is practically guaranteed. To gather such information can take days, weeks, or even months depending on the specifics of the loan.

Hard money loans, on the other hand, are relatively fast in comparison to a traditional loan. "How fast?" you might ask.

Compared to a public lender, where a loan request could take up to 90 days to complete, hard money lenders may be able to process a loan in as quickly as 48 hours. This allows for individuals to act on the best deals available as fast as possible.

Related: The Ultimate Guide to Hard Money Loans

Who Really Benefits From Hard Money Loans?

As you could have guessed, those with a less-than-perfect financial history commonly take advantage of hard money loans. Since banks will likely not approve a traditional loan request from someone with a bad credit score or a history of bankruptcy, private lenders are a better option.

We as hard lenders are less concerned about the details of the borrower, so those with dismal credit history need not fret—hard money loans are a practical option.

There may be a negative connotation associated with hard money loans because of our willingness to lend to those with poor financial history. However, there are other types of people who can benefit from soft loan alternatives, too.

Consider those who need money very quickly—like real estate investors trying to scoop up a hot deal. Because of its swift turnover time, hard money loans offer a solution.

Looking to buy a foreclosure or short sale? Investors can get their hands on the funds necessary to purchase in an exponentially faster amount of time than that of a traditional loan.

Hard money lenders are both personal and independent financial institutions, so those looking for a loan need only meet the individual lending company's unique policies. Typically, these policies are much more lenient with minimal qualifications required for approval.

This is why hard money is attractive to anyone who may not want to divulge their personal financial history, as well as anyone who needs money fast.

How Do Lenders Decide Who to Approve for a Hard Money Loan?

Since hard money lenders are not concerned with the details of the borrower, what do they base their decision to lend on? The answer is simple: the value of the collateral.

Hard money lenders focus their concern on what is called the loan-to-value ratio, or LTV. The LTV is the loan amount divided by the value of the property.

While the LTV requirement is unique to each vendor, you can generally expect it to be around 60 to 70 percent.

This means, if someone is looking to take out a $100,000 loan, the property they plan to leverage with the lender needs to be valued somewhere between $140,000 to $160,000. That way, even if the borrower fails to pay anything back, the lender remains secure since the property is valued higher than the amount of money loaned.

The potential to gain or lose an asset with substantial equity is what both motivates the lender to supply the money and encourages the borrower to pay it back quickly.

The only caveat here is the property type. Even if the estate has an acceptable LTV, for many lenders, the type of real estate being used as collateral (i.e., schools, churches, car washes, gas stations, hotels, etc.), may not fit into their lending portfolio.

The lender has to protect itself. So, by only agreeing to lend to those assets that a lender feels comfortable with, the lender secures the ability to liquify the leveraged asset for cash without being limited by the property type.

Related: 7 Questions Real Estate Investors Should Ask When Selecting a Lender

Why Do Hard Money Loans Get a Bad Rap?

One of the disadvantages associated with hard money loans, and one of the main reasons people shy away from them, are heightened interest rates.

Because these loans are specifically suited for investments that will turn a profit quickly, interest rates can go as high as 18 percent. In contrast, traditional loan interest rates usually hover around 5 percent.

While this may seem like an exceptionally high rate, being able to finance large expenses quickly in order to secure an investment can mean thousands of dollars in potential profit for the borrower. That is, if they pay the agreed upon amount in the agreed upon time.

This means the borrower gets to make their investment, and the interest rate means profit for the lender. Win-win!

In Conclusion

Many hard lending companies are known for their expediency, simplicity, and transparency. Do not let falsely perceived notions about hard money lending get in the way of making the investment of a lifetime!

Prospective investors looking to flip a house on foreclosure for big profits, those with a lackluster credit score, or anyone who simply doesn't want to jump through the hoops of what is conventional banking can all reap the advantages of taking out a hard money loan if done correctly.

What other questions about hard money can I answer for you? 

Ask me anything in the comment section below. 

Sacha Ferrandi has over 20 years in the finance and real estate industries. After graduating from Arizona State University, Sacha began a sales position at a well-known Fortune 500 company, where h...
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    The German
    Replied over 11 years ago
    I believe that the best real estate sales happen in the country side. It is a win-win situation and that is a market that can never slow down. In an area like rural Germany or France, the vistas are so beautiful that people can’t resist it. And the price is also pretty realistic. Nice article and all the 4 points make sense. Thanks 🙂
    Crystal Tost
    Replied over 9 years ago
    I find the advertising in other countries and in mediums that are not real estate related a waster of money and time. I think targeted advertising coupled with good pricing and proper presentation will get the house sold to a local buyer that is likely out there as we speak. Why focus on an audience that you are not even sure exists in mediums that are not targeted?
    David Grbich
    Replied almost 9 years ago
    Setting a realistic list price at 10% below market may lead to a very lonely existence as a realtor – not many sellers in the California market have the equity to price 10% below market – but yes that should get the home sold. Great point overall – thanks.
    AYana Morgan Specialist from Hartford, CT
    Replied 10 months ago
    Hi Sacha, Do hard money lenders lend for down payments, closing costs, or inspections on potential rental properties for commercial units?
    Sacha Ferrandi Lender from San Diego, California
    Replied 10 months ago
    Hello Ayana. To answer your question, typically, no. Most, if not all hard money lenders on acquisitions require the borrower to have some “skin the game” or down payment. The reason being is because by a borrower having something to lose, it makes a lender feel more comfortable that the borrower is financially committed as well.
    Angelica Leyva
    Replied 4 months ago
    How much do they usually require for us to have ? Usually just downpayment amount?
    Lisa Misuraca from Tucson, Az
    Replied 10 months ago
    Question My hard money lender is lending 100 percent and wants to use another property of mine for the collateral. Is there a potential problem with that?
    Adam Frank Rental Property Investor from Yucca Valley
    Replied 10 months ago
    Hey Sacha, Can hard money be utilized to purchase foreclosures at the court house auctions?
    Sacha Ferrandi Lender from San Diego, California
    Replied 10 months ago
    With my firm, we do not provide capital for auction properties because it is a moving target. What I mean by this is that we could have an agreement with you to purchase a property for price “X” and then the property gets bid up beyond that number and we both cannot close the loan. I am sure there are some lenders that do have this type of financing though.
    Sacha Ferrandi Lender from San Diego, California
    Replied 10 months ago
    With my firm, we do not provide capital for auction properties because it is a moving target. What I mean by this is that we could have an agreement with you to purchase a property for price “X” and then the property gets bid up beyond that number and we both cannot close the loan. I am sure there are some lenders that do have this type of financing though.
    Katie Rogers from Santa Barbara, California
    Replied 10 months ago
    The high interest rate can be very dangerous. If you got a hard money loan for property located in certain areas of California last year, your time table for rehab got completely upended by California’s worse wildfires in history. Contractors were pulled away from whatever jobs they had in order to rebuild or repair houses destroyed or damaged by the fires and the debris flows from the heavy rains. You are paying that high interest rate while you are waiting for contractors to become available again. A couple of percentage points above what a standard mortgage would cost is fine and fair, but exorbitant interest rates are immoral, whether or not they are legal.
    Sacha Ferrandi Lender from San Diego, California
    Replied 10 months ago
    There is no denying that hard money loans have higher interest rates and the reason why borrowers need to have a clear exit strategy and be prepared for these types of circumstances. That being said, I also agree with you that “exorbitant” interest rates are immoral but solid hard money lenders that are fair with their rates and fees absolutely serve a huge need that banks cannot provide.
    Joshua Benjamins Lender from Virginia Beach, VA
    Replied about 1 month ago
    If you ever compare the price of a gallon of milk between Costco and 7-11 you can understand the reason why Hard Money Loans cost more. It’s all about convenience, people now days will pay for it. Think about Valet parking, overnight shipping, and dining out; all more expensive then the alternatives. Each of them need to make sense for your budget. Finacial literacy is a talent, utilize your talents wisely.
    Katie Rogers from Santa Barbara, California
    Replied 10 months ago
    18% is definitely not a fair rate. A fair rate is about a third of that. Some hard money lenders have been known to foreclose on a pretext even when the borrower is paying on time.
    Jason Smith
    Replied 10 months ago
    This is not rational. First, your suggestions that lenders are foreclosing when a borrower is performing is false. That does not happen. Lending at bank rates (the rate in which you suggest is ‘moral’), is based on risk factors and volume that does not equate with these types of borrowers. These borrowers are not homeowners trying to find a place to live. They are individuals or groups that are entrepreneurial and are operating a business meant to profit. They understand the risk of their project, understand the cost of borrowing and know how to pencil a project to make these loans work in their favor. It makes ZERO sense to lend in these scenarios for bank rates. 4-6% rates wouldn’t even cover the costs of making that loan, let alone what would happen if the borrower defaults – a risk that is much higher than residential long term loans. For a 4-6% return, you are better off investing in some sort of bond or mutual fund. I would also argue that bank rates as they are right now, are not sustainable for banks either. Rates are too low, and it only encourages people who shouldn’t be borrowing to over leverage themselves.
    Katie Rogers from Santa Barbara, California
    Replied 10 months ago
    Hard money lenders foreclosing does happen, and happens all the time. I wouldn’t call 6% a “bank rate” when borrowers can get half that to accomplish the same purpose as a hard money lender. Just get an ARM or a cheap interest-only loan, then renovate and sell within a year to pay the whole thing off. Just because hard money lenders want to make a profit does not mean that that profit should be exorbitant or usurious. The loans do not coat much and the risk of default isn’t all that high. With equities, when the price goes down you lose your money. When a lender repossesses, they acquire a property worth 20%-25% more than they lent (the whole point of LTV). I agree bank rates are too low. They should be at a level that is a win-win for everyone, borrowers, lenders and savers. If rates were higher, house prices would correct to a level that is in historical sync with wages–which remember pay the payments. Right now the winners are lenders who get a lower interest rate but on higher principal than “normal.” and real estate agents who get out-sized commissions because in many markets houses are still overpriced relative to wages. In my community, they think a 4% cap rate is pretty good. In any case, 18% is extreme. Even Lending Club, with no collateral backing their loans charge far less.
    Ken Bailey Contractor from yucca valley, ca
    Replied 10 months ago
    Thanks Sacha, This is great information. Enjoyed how you broke it down. Respectfully, Ken Bailey
    Alain Martinez
    Replied 10 months ago
    What is a typical pay back schedule on a hard money loan.
    Jason Smith
    Replied 10 months ago
    Typically, hard money is paid back upon sale of the property lent on. Interest might be paid monthly, or it could also balloon at the end. Loan terms generally are anywhere from 6 month to 2-3 years, but generally don’t go much longer. However, every project is different and the hard money lender has much more flexibility and creativity at their disposal too craft a loan to fit a borrower’s needs.
    Edward Ringer
    Replied 10 months ago
    Do hard money lenders offer any “softer” loans? Such as a traditional mortgage on a cash flowing rental property with a slightly higher interest rate than a typical bank?
    Jason Smith
    Replied 10 months ago
    Hard money lenders will lend on cash-flowing investment properties, yet many will not lend for long terms and would expect a borrower to pay the principal off within a shorter amount of time. Often, investors will seek hard money to acquire and/or improve a property, and for the time to rent up, but ultimately would want the borrower to refinance them out with a traditional mortgage after the fact. Hard money lenders do not typically offer traditional mortgages. If you lend to borrowers who intend on occupying their property for residential purposes, that lender comes under the regulation called Dodd-Frank, which would require that lender to follow the lending rules set up for primary residential loans. These requirements are vast and detailed, which is why you are required to provide tax returns, paystubs, credit, and many more documents. If they miss something in their underwriting, the loan could be rescinded and the investor could lose all of their principal, as well as the security. Therefore, hard money lenders generally stick to investor properties and focus their underwriting on the asset rather than the borrower.
    Ronald L Bruce from Pensacola, Florida
    Replied 10 months ago
    I have a request to loan $80,000 for two year at 6% to a person with a poor credit rating. The loan is secured by a residence valued at $200,000. The person has a good community reputation. Your advice would be appreciated.
    Baron Hicklin from Chester, South Carolina
    Replied 4 months ago
    Hi Sacha, Great article. I am a newbie. I am ashamed to say how long I've been a newbie. I turned pro because I am finally ready to go. I have always figured some how or some way I could find a deal but I never could see the money. And that was my FEAR! So Thank you! I can't say all my fears are gone, but your article is making me feel a little better. I am beginning to see a little clearer. Thanks Again!
    James Wootton Investor from Columbus, Ohio
    Replied 4 months ago
    Hi Sacha, I am planning to fund a 12% hard money first mortgage loan at 70% of ARV for a flipper. Thereafter I want to free up some capital for myself to do more deals by hypothecating that mortgage receivable as security to another private money investor with a 7% note. Can you provide with with a blank specimen hypothecation form?
    Sakiliba Mines
    Replied 3 months ago
    I recently purchased an owner-occupied property and since decided I’d rather convert it into two condos and sell (which is being done a lot in my area). Would a hard money loan for the flip be an option? It seems like all examples given include the price of the property.
    Armando Alcala
    Replied 3 months ago
    I am interested in converting my IRA in to a self directed IRA, and lend money to home flippers in my market. What source can you recommend to research all that is needed to do this. Thank you
    Ellie Figueroa
    Replied about 1 month ago
    Sacha, Is 2.9 origination, with a 12.9 interest rate on a 345 hard money loan average fee or good for a first time investor?
    Odie Ayaga Specialist from Delran, NJ
    Replied about 1 month ago
    Right now? I'd say probably not. It's a competitive market. Origination is fine, but the interest rate is a bit high unless there are mitigating circumstances
    Jacob G. Property Manager from Tampa Florida
    Replied about 1 month ago
    Thanks for the insights - very helpful! I did my second investment home in Atlanta with - I liked them as a hard money lender because I dealt directly with the broker and didnt pay any broker fees!