Hard Money Lenders - How exactly do they work?

6 Replies

Hello everyone,

I posted a forum topic a few days ago regarding hard money and how it could be used to creatively finance a deal. Well, after thinking more on the topic, I realized I was still fuzzy, and I was simply hoping for some guidance.

With a flip deal, it seems pretty straight forward. One could potentially use HML to purchase and rehab. Then sell (hopefully with increased value through the rehab) and pay back the HML, with some profit left over for yourself.

However, I would be interested in using hard money for a buy and hold rental. Using a HML to help finance and rehab, then refinance into a conventional mortgage, pulling out cash to repay the HML. This is where it gets a bit fuzzy for me. When you refinance (or maybe technically finance) into a conventional mortgage, is the equity you gain the entire value of the property since you're not refinancing from a previous mortgage loan? Also, I know that when you (re)finance into a conventional mortgage, you'll still have to put down 20-25% based on the property. I assume you'll want to make sure the property increased in value enough to both pay back the HML and have some left over to put toward the down payment?

Any help would be greatly appreciated! Thanks!

@Mikael Winkler

You are partially correct. You use the HML to acquire and rehab the property. Once the rehab is complete you do a Rate and Term refinance into a conventional loan. This is NOT a cash out refi, the new lender is just changing the rate and term of the loan. Because you rehabbed the property, you have built the equity into the home. That means that you don't have to bring the typical 20-25% down. The refi lender will do an appraisal of the end value, and hopefully it comes in the same or higher than the estimated appraisal done by the HML. That way, the new loan will cover the cost of the HML and you may have some "extra" to cover the closing costs of the refi. If there is only enough to cover the HML, then you would have to pay the closing costs of the refi, which shouldn't be very much.

Hopefully this helps.


Hello Mikael,

This might simplify the HML 'Loan'. There is a record of the Loan and it will be recorded as a first lien against your property. So when you go to Refinance into a conventional loan or whatever type you choose, they will do a normal appraisal, any outstanding Lien's will be paid at closing.

Normally in order to do a HML - these lenders are looking for 50 - 65% LTV. If you have this currently and the HML includes the funds to repair - then you shouldn't have any problems having the 20 -25% (equity) you would need for your conforming loan. This should always be equity based, so you aren't having to put any more funds down. Do your research, HML's are not all the same. If you are doing 6 - 12 month term. Your ideal rate should be around 9 - 10% + 3-5 points down. Look around you will see a lot of 10.99% - 14%. Before you take the plunge, look at your sphere of people you know. I actually prefer working with Private Lenders as in someone I know, who may know someone... It's a little easier, and once you build that relationship and have a couple good deals - they will be all the more willing to work on future deals.

Once you get to the Refinancing part - I would suggest looking at the 15 -20 year notes vs. the 30 year notes as you will save tens of thousands of dollars in interest.  Just make sure your rental income covers ALL the expenses + 20 % for estimated repairs monthly... There is a lot to think about.  Make sure your numbers work or it's just not worth it. 

Hope I have helped you some... 

@Sean Blomquist and @Rochelle Kretchmar , you have both helped immensely. This gives me a more solid basis of understanding to move forward with my research into hard money. Rochelle, I see that you're a loan originator. Would the best way to go be to let the lender that will be handling a potential refy know up front what your plan is involving the hard money? If I were to potentially go this route, I'd want to be confident I can refy.

Thanks again!

@Mikael Winkler

Yes, talk with a refi lender first, so you know that you have that strategy set up. You are going to have better luck with smaller community banks or lenders that are direct to Fannie Mae. Going to the "big" banks, is going to be very frustrating for you. If you do use HML, ask them who they would suggest to talk to for the refinance.


Great, yeah if there's one thing I've learned thus far, it's the importance of having your team on the same page. It can lessen the frustration when issues arise (and I'm sure they will no matter what!)...thank you for the insight. I really do appreciate it!