Hard Money Loan

Last Updated: 03/24/2024

Loan Highlights

  • Real estate investors or property developers looking for short-term financing with flexible approval criteria.
  • Borrowers with poor credit, limited income documentation, or properties that do not qualify for traditional financing.
  • Borrowers seeking quick access to capital for property acquisitions, renovations, or investments with potential for high returns.
  • Hard Money Loans offer speed and flexibility, making them ideal for investors who need financing for projects that may not qualify for traditional mortgages.
  • Suitable for fix-and-flip investors, property developers, or those with distressed properties.
  • Ranges from $50,000 to several million dollars, depending on borrower qualifications, property value, and project scope.

Interest Rate Estimate

10-12% Market Standard (strongly resistance to market change and index adjustment). Significantly dependent on risk tolerance of the direct lenders.
*The mortgage interest rate calculation above is estimated.

Terms and Breakdown:

  • Short-term loan typically with terms ranging from a few months to a few years.
  • Higher interest rates and fees compared to traditional mortgages.
  • Down payment typically ranges from 10-25% depending on your experience and profit margin of the project.
  • Loan-to-cost (LTC) ratio based on the property purchase price typically ranges from 75-90%.  
  • Loan-to-value (LTV) ratio based on the property’s after-repair value (ARV) typically ranges from 50% to 70%.
  • Interest-only payments during the loan term, with the principal typically due in a lump sum at the end of the term.
  • Can be used for both residential and commercial properties.

Requirements:

  • Collateral: Property being purchased or renovated serves as collateral for the loan.
  • Credit score and income requirements may be less stringent compared to traditional mortgages, with the property’s value and potential for return being the primary focus.
  • Clear exit strategy: Borrowers must demonstrate how they will repay the loan, typically through property sale, refinance, or other means.
  • Property appraisal and inspection may be required to assess value and condition.
  • Documentation:
    • Typical Documents: Typically less documentation required compared to traditional mortgages. This may include property appraisal, renovation plans, proof of funds for down payment or repairs, and personal financial statement.
    • Full documentation (full docs) such as tax returns and pay stubs are typically not required.

Derivative or Related Products:

  • Fix-and-Flip Loans: Similar to Hard Money Loans, these are tailored for real estate investors purchasing properties with the intention of renovating and selling for a profit.
  • Bridge Loans: Provide short-term financing for property acquisitions or renovations with flexible approval criteria, similar to Hard Money Loans.

Funder and Sponsors:

  • Hard Money Loans are typically offered by private lenders, individual investors, or specialized hard money lending firms.

Notes:

  • Common misunderstandings with Hard Money Loans include:
    • Higher costs: Hard Money Loans typically come with higher interest rates and fees compared to traditional mortgages due to the short-term nature and higher risk for lenders.
    • Limited availability: Hard Money Loans may have more lenient approval criteria but may not be available from all lenders, requiring borrowers to seek out specialized lenders or investors.
    • Risk of foreclosure: Borrowers should have a clear exit strategy and understand the risks associated with Hard Money Loans, including the potential for foreclosure if they are unable to repay the loan as agreed.