Quick summary

Hard‑money loans provide fast, short‑term capital secured by property. They’re issued by private lenders and priced higher than bank loans because the lender relies on the property’s value (not the borrower’s FICO) and assumes higher risk.

How hard‑money loans work

  • Collateral: The property (purchase price or after‑repair value) is the core underwriting factor. Loan‑to‑value (LTV) typically ranges from 60–75% of value, though exact thresholds vary by lender.
  • Rates & fees: Expect higher interest rates and upfront fees — commonly 8–15% interest plus 1–4 points. Some markets or specialty lenders may be outside this band.
  • Term: Short terms (6–36 months) intended for a flip, bridge, or rehab.
  • Speed: Approvals and funding can happen in days to weeks because lenders focus on the asset and use streamlined underwriting.

(For broader context on nonbank lending and how nontraditional lenders differ from banks, see the CFPB’s resources: https://www.consumerfinance.gov/.)

When a hard‑money loan makes sense

Use hard‑money financing when:

  • You must close quickly (auctions, court‑ordered sales, or competitive markets).
  • The asset’s ARV (after‑repair value) supports a profitable flip even after higher financing costs.
  • Conventional underwriting won’t close in time (credit issues, complex title, or nonstandard property use).
  • You plan a short, definitive exit strategy: resale, refinance to a long‑term mortgage, or pay off with project proceeds.

Examples: fix‑and‑flip projects, bridge financing while you refinance, buying distressed properties at auction, or funding a rehab when draw schedules from banks slow progress.

Risks and red flags

  • Cost: Higher interest, points, and origination fees reduce profit margins.
  • Short timeline: If your exit stalls, extensions can be expensive or require a new loan.
  • Aggressive LTV or inflated ARV assumptions increase default risk.
  • Poorly documented title, contractor disputes, or zoning issues may trigger lender enforcement.
  • Unlicensed lenders or unclear loan terms — check licensing in your state and get terms in writing.

How to evaluate a hard‑money lender (practical checklist)

  1. Confirm licensing and reputation — request references and recent deals.
  2. Ask for a clear term sheet: interest rate, points, origination fees, repayment triggers, prepayment penalties, and default remedies.
  3. Verify LTV methodology: do they base the loan on purchase price, ARV, or both?
  4. Confirm inspection and draw processes for rehab loans and expected timeline to fund draws.
  5. Check whether the lender requires a personal guaranty or cross‑collateralization.
  6. Model worst‑case numbers: longer hold time, higher costs, and lower sale price.

Exit strategies to plan before borrowing

  • Sell the completed rehab (most common for flippers).
  • Refinance into a conventional mortgage once repairs and stable income are established.
  • Convert to a longer private note or negotiate a bridge extension (costly).

See our deep dive on exit planning here: Exit Strategies for Short‑Term Real Estate Loans.

Real‑world considerations (brief case)

In practice, I’ve seen investors win auction deals because a hard‑money lender could close in five business days. The higher financing cost was absorbed because the purchase price at auction left a healthy margin. That margin is the key: if your numbers don’t tolerate the higher rate and fees, walk away.

Related reading

Sources & further guidance

Professional disclaimer: This article is educational and not personalized financial advice. Costs, licensing, and availability vary by state and over time; consult a qualified lender or real‑estate attorney before committing to financing.