A Guide to Hard Money Real Estate Loans & Lenders [2024]

Hard money lending is becoming an increasingly popular form of financing among real estate investors.

However, the hard money lending industry still has many misconceptions attached to it, while its specific funding terms are not always fully understood by would-be borrowers.

So what exactly is a hard money loan in real estate? 

We get asked this question a lot. That’s why we’ve written this guide to hard money lending, to answer the most common questions we get asked. 

Key Takeaways 

• Hard money loans have a very quick approval process, making them ideal for real estate transactions that require immediate funding.
• The primary criterion for loan approval is the “after-repair value” (ARV) of the property, not the borrower’s credit score.
• These loans are often negotiable in terms of length, interest rates, and repayment schedules.
• Although hard money loans are more accessible and flexible, they come with higher interest rates and fees compared to conventional loans.
• Hard money lenders offer various types of loans including bridge loans, fix-and-flip loans, and construction loans.

What is a Hard Money Loan?

A hard money loan is a type of financing typically used in real estate investing. It’s secured by real estate and provided by private lenders, rather than banks or other institutional lenders. These loans are primarily used for investment purposes rather than personal use.

Delving deeper, the key characteristics of hard money loans are:

• They can be processed and funded much faster than traditional loans.
• They typically have a shorter repayment period.
• These loans come with higher interest rates compared to conventional loans.
• Lenders usually offer lower loan-to-value ratios compared to traditional loans.

Difference Between Hard Money Loans and Traditional Loans

Traditional real estate loans are generally repaid over a longer term and based on the borrower’s credit score and income. On the other hand, hard money loans are repaid over a much shorter term and are primarily based on the potential value of the property once it’s been renovated (the “after-repair value” or ARV). 

Additionally, interest rates for hard money loans are typically higher due to the greater risk, and the approval process is significantly faster and less bureaucratic.

Plus, hard money loans are particularly suitable for borrowers needing quick financing to secure a deal, for distressed properties requiring rehabilitation, or where the borrower does not meet traditional lending criteria.

The Mechanics of Hard Money Loans

Hard money loans provide a quick financing option for real estate investors. They focus on the asset involved rather than the borrower’s personal credit. 

Here’s how it works.

The Process of Securing a Hard Money Loan

First, the borrower finds a property that offers potential high returns as an investment, such as a distressed home that is ripe for a fix and flip and project. Then, the borrower approaches a hard money lender with a proposal, including details of the property and a business plan for the intended investment.

Next, the lender assesses the property, which requires an independent appraisal. If the evaluation is positive, the lender makes an offer detailing the loan amount, terms, interest rate, and any other conditions.

Upon agreement, the legal paperwork is signed, and the funds are distributed, typically within a few days or a couple of weeks.

Typical Loan Terms and Conditions

Most hard money loans usually range between 6 months to 5 years. Depending on the risk, market conditions, and the lender. 

Interest rates are generally higher than those of traditional loans. Additionally, these loans may require interest-only payments with a balloon payment at the end of the term. They may also include some principal repayment over the loan’s duration.

The balloon payment is usually covered by the investor either selling the unit once the renovation is completed, or alternatively by refinancing it into a rental loan, then renting the property out.

Criteria for Approval

Hard money lenders typically focus on the following factors:

• The current market value and the potential ARV are crucial. Lenders want to know how much potential value can be added once the project is completed.
• The feasibility and profitability of the plan presented by the borrower.
• The size of the down payment or existing equity in the property.
• An exit strategy for how the borrower intends to repay the loan.

Interest Rates and Fees

Hard money loans are known for their expediency and less stringent approval requirements. However, this comes at a cost. Interest rates can range from 10% to 18%, depending on: 

• The lender’s assessment of risk
• The ARV
• Local market conditions
• Loan-to-value ratio
• Borrower’s experience and track record

Common Fees Associated with Hard Money Loans

In addition to higher interest rates, hard money loans often involve several types of fees, which can include:

• Origination fees: These are charged by lenders for processing new loan applications. They are typically calculated as a percentage of the total loan amount, usually from 2% to 6%.
• Appraisal fees: Since the loan is largely based on the property’s value, an independent appraisal is usually required, for which borrowers must pay.
• Closing costs: These can include various fees due at the signing of the loan, such as document preparation fees, title policy, and escrow fees.
• Early payment or prepayment penalties: Some lenders charge fees for early loan repayment. Borrowers should clarify this point before agreeing to the loan terms.

Types of Hard Money Loans in Real Estate

Hard money loans cater to a variety of real estate investment needs, each tailored to specific scenarios and projects. The most common types include: 

• Fix and Flip Loans: Fix and flip loans are designed for real estate investors who purchase properties to renovate and then sell on for a profit. 
• Bridge Loans: Bridge loans are short-term loans used to “bridge” the gap between immediate funding needs and longer-term financing solutions. They’re used when an investor needs to secure a financing quickly before obtaining traditional financing or selling another property.
• Construction Loans: Construction loans are specifically intended for financing new construction projects or major renovations. These loans are disbursed in stages based on the completion of different phases of a construction project.

What is a Hard Money Lender?

A hard money lender is a non-institutional (non-bank) individual or company that loans money for the purpose of investing in real estate ventures. 

To elaborate, hard money lenders are characterized by their ability to offer faster closings, relaxed credit requirements, and loans based on the property’s value. 

Plus, they make lending decisions based on the collateral securing the loan, and they are less concerned with repayment sources.

The most common types of hard money lenders are: 

• Individuals: These are private investors who lend their personal funds to others as a form of investment. They can be more flexible with terms and negotiations but might have limited capital.
• Companies: These are entities specifically established to lend money for real estate investments. Such companies typically have a pool of investors, or they operate with large capital bases.

Factors to Consider When Selecting a Lender

• Reputation: Consider the lender’s reputation in the industry. Research reviews and testimonials from previous clients.
• Speed of Processing: Since one of the advantages of hard money loans is the speed of funding, verify how quickly the lender typically processes and disburses funds.
• Flexibility: Look for a lender who can offer flexible terms that match your specific project needs and timelines.
• Transparency: Ensure the lender provides all terms and fees upfront to avoid any hidden charges later on.

Questions to Ask Potential Lenders

• What are your loan-to-value ratios?
• What is the interest rate and are there any points involved?
• Are there any fees I should be aware of upfront?
• How quickly can you close once all documents are submitted?
• Can you provide references from recent borrowers?

Potential Risks of Working with Hard Money Lenders

Like other financial endeavors, working with hard money lenders comes with some risks. 

For example, most hard money loans come with shorter repayment terms. This can be risky if your property doesn’t sell or refinance as planned.

Additionally, if you fail to repay, the lender can seize the collateral (the property), which can be a significant risk if the property value hasn’t increased as expected.

You can mitigate these risks by having a detailed plan and budget for your project to ensure it stays on track and within financial limits.

Plus, it’s important to be clear about your exit strategy whether through selling, refinancing, or renting the property. Lastly, be aware of the terms of your loan agreement to avoid any surprises during the repayment period.

Securing a Hard Money Loan 

Securing a hard money loan involves several key steps, including:

Qualifying for a Hard Money Loan

Qualification criteria for hard money loans differ from traditional loans. Lenders will typically look for: 

• Credit score requirements: Some hard money lenders still have minimum credit score requirements. These requirements are usually more lenient and typically focus on the ARV and the equity involved.
• Collateral and equity: The property itself serves as collateral, and lenders typically require that borrowers have significant equity invested in the property. 
• Experience and track record: Lenders may also consider a borrower’s experience and track record in completing similar real estate projects.

Preparing a Strong Loan Application

A well-prepared loan application increases your chances of approval and can lead to better loan terms. When preparing your loan application, be sure to include the following details: 

• A comprehensive business plan outlining the project, expected timelines, and financial projections.
• A professional appraisal and detailed information about the property, including its potential for value increase.
• Proof of income or bank statements.

Negotiating Terms and Interest Rates

Make sure you fully understand all the terms of the loan. That includes interest rates, fees, repayment schedule, and any penalties for early repayment.

Also, consider what aspects of the loan are most important to you. You may wish to negotiate a lower interest rate, a longer repayment period, or more flexible terms regarding how the loan funds can be used.

Benefits and Drawbacks of Hard Money Loans

Hard money loans offer unique advantages and carry specific drawbacks that are important for real estate investors to consider before deciding on this financing method.

The advantages of hard money loans are: 

• Speed of approval and funding
• Rapid processing
• Less red tape
• Flexibility in terms and conditions
• Negotiable terms
• Customizable loan structures

The disadvantages of hard money loans include: 

• Higher Interest Rates and Fees
• Costly Financing
• Additional fees such as origination fees, closing costs, and possibly prepayment penalties
• Shorter repayment terms
• Pressure to refinance or sell

Alternatives to Hard Money Loans 

While hard money loans are a popular financing option for many real estate investors due to their speed and flexibility, they are not the only route available. 

Understanding the alternatives can help you make more informed decisions. Here are some of the main alternatives to consider:

• Conventional bank loans: Conventional loans offer longer repayment terms and lower interest rates. This makes them suitable for borrowers with good credit who aren’t in a hurry.
• Crowdfunding platforms: Real estate crowdfunding platforms pool funds from multiple investors for large projects. They’re ideal for attracting community interest and offering access to numerous investors and potentially lower rates than hard money loans.
• Home equity loans or lines of credit: These offer homeowners the ability to borrow against their property with fixed or flexible rates. They’re ideal for those comfortable using their homes as collateral and seeking lower interest rates and flexible fund access.

When considering alternatives to hard money loans, be sure to evaluate the timeline of your project, cost-effectiveness, and risk tolerance.

The Current Market for Hard Money Loans in 2024

In 2024, interest rates have stabilized and are expected to drop by the fourth quarter this year. However, if interest rates rise, hard money loans might become more expensive. But they can still be competitive given their speed and flexibility.

Additionally, with advancements in technology and potentially lower interest rates in the future, the hard money lending market could continue to grow, especially as traditional lenders remain cautious in the face of economic uncertainty.

However, new TRID regulations may improve borrower protections but could also increase the costs for lenders, which might be passed on to borrowers.

Frequently Asked Questions 

Investors often have several queries regarding hard money loans. Here are answers to some of the most commonly asked questions to help clarify the nuances of these financial instruments.

What is the difference between hard money and private money?

Hard Money Loans are usually issued by companies or investors that specifically lend money as a business, focusing on the property value and potential returns. They are generally more formal, with structured terms and rates.

On the other hand, private loans come from individuals or non-professional lenders, such as friends or family, and can offer more flexibility. The terms are often negotiable, depending on the relationship between the borrower and the lender.

Can I get a hard money loan with bad credit?

Yes, it is possible to secure a hard money loan even with bad credit. Hard money lenders primarily focus on the value of the property and its investment potential rather than the borrower’s credit history. 

However, the terms might reflect the increased risk and result in higher interest rates or stricter loan-to-value ratios.

How quickly can I obtain a hard money loan?

It’s often possible to obtain approval and funding within a week or two, assuming that all necessary documents and appraisals are completed promptly. Some lenders might even provide funding within a few days if all conditions are met quickly.

What are the typical interest rates for hard money loans?

Typically, rates range from 10% to 18%. These rates are generally higher than those for traditional bank loans due to the higher risk and shorter term of hard money loans.

Final Thoughts

Hard money loans offer a powerful tool for real estate investors. They provide rapid financing solutions that are not typically available through traditional banking routes. 

These loans are particularly valuable in scenarios where quick action is necessary or when traditional financing qualifications pose a barrier.