How do hard money loans work?
Hard money loans are similar to mortgages in that they use real estate as collateral. They’re more often used in real estate investment transactions, such as rental properties or house flipping.
A hard money loan is a secured loan that provides fast access to cash.
These loans generally have a faster application and approval processes than traditional personal loans. They also tend to provide more flexibility and aren’t bound by the same rules and regulations as the traditional loan industry.
However, they tend to have more expensive monthly payments, so having rental income or a similar stream of money can help the borrower pay back the loan faster. They also have lower loan-to-value (LTV) ratios, so they require higher down payments. The maximum LTV on a hard money loan can range from 50% to 70%.
Note that some hard money lenders don’t offer loans for owner-occupied residences, though individual homebuyers may consider them in a tough situation. In this case, alternative options may make more financial sense than a hard money loan.
» RELATED: What is a private mortgage lender?
Hard money loan rates
Most hard money loans have much higher interest rates than traditional loans — sometimes triple the rate.
However, once you’ve become an experienced flipper or rental property owner, your rates may become more favorable, especially if you continue to partner with the same investor. This was true for Tony, a reviewer from Washington, who said his rate decreased from 12% to 2.66%.
Pros and cons of hard money loans
There are pros and cons to consider before you take out a hard money loan.
Pros
- Faster approvals
- May have looser restrictions
- Good business option
- Quick payouts
Cons
- Usually higher interest rates
- Lower loan-to-value ratios
- Fast repayment required
- Can be harder to find lenders
How to get a hard money loan
To get a hard money loan, take the following steps:
1. Find a lender
To get a hard money loan, you’ll typically have to find a private lender, investment group or individual investor. Searching online is a great place to start. You can also talk to local real estate investors in your area or connect with a local Real Estate Investment Association (REIA) member to learn more. If you can’t find anyone local, consider a national lender or an online hard money lender.
2. Make sure you meet any requirements
To get a hard money loan, you might need a 30% to 70% cash down payment.
Because hard money lenders don’t approve based on credit, you might not need to worry about having a lower credit score and can compare as many options as you want. Instead, lenders are more concerned about the property that will secure the loan.
To get a loan, you’ll usually need between 30% and 70% cash on hand for a down payment. Most lenders also require a certain amount of cash reserves to cover holding costs, like insurance and taxes. If you don’t have enough saved, they may take out some of the loan funds to use for these costs.
3. Apply for a loan
To get a loan, you’ll need to apply either online or in person. Applications usually involve showing proof of income, describing a detailed exit strategy for how you plan on making a profit and explaining other details of your project.
4. Wait for funds
Once you’re approved, lenders usually disburse funds within a few days to a week.
Hard money loans vs. traditional financing
Hard money loans and traditional financing serve different needs and borrower profiles.
Hard money loans
Hard money loans are primarily asset-based lending. As a result, lenders focus more on the value of the property that’s used as collateral than on the borrower’s financial history, so borrowers with poor credit may still qualify.
Hard money loans are best for property investors or house flippers who need fast access to capital and are confident in a quick resale or refinance. That’s because these loans come with higher interest rates, shorter repayment terms and larger down payment requirements.
Traditional financing
Traditional loans are typically offered by banks and credit unions and involve a lengthy application process that includes a credit check, income verification and debt-to-income (DTI) ratio analysis.
Traditional financing is generally best for long-term homeowners or borrowers seeking stability and lower costs. These loans generally offer lower interest rates, longer repayment terms and higher loan-to-value ratios.
» RELATED: How to get a mortgage for a rental property
Alternatives to hard money loans
If you’re considering taking out a hard money loan because your credit is bad, there are other options that may be more financially beneficial.
FHA loans
For example, if you need a mortgage, the Federal Housing Administration (FHA) backs FHA loans for borrowers with credit scores as low as 500. These loans come with low down payment requirements and straightforward financial requirements.
VA loans
Veterans, military service members and eligible spouses may be able to get a loan backed by the U.S. Department of Veterans Affairs (VA). VA loans don’t require a down payment or private mortgage insurance (PMI).
FAQ
What credit score do I need to qualify for a hard money loan?
Hard money lenders usually don’t base their decisions primarily on credit scores. While some lenders may check your credit, the main factor is the value of the property being used as collateral. This makes hard money loans potentially accessible to borrowers with fair or poor credit.
How quickly can I get funding for a hard money loan?
One of the biggest advantages of hard money loans is speed. After submitting an application and supporting documents, you can receive funding in as little as a few days to a week, depending on the lender and complexity of the deal.
Are hard money loans safe?
Hard money loans can be safe when used wisely and for the right reasons. They are best suited for experienced real estate investors who understand the terms and risks. However, because of high interest rates and short repayment periods, borrowers should evaluate the terms carefully and ensure they have a solid repayment or exit plan in place.
Bottom line
Hard money loans have some benefits, such as a relatively speedy approval process and fast funding. However, there are downsides that you should seriously think about, like high interest rates and short repayment periods. Because of the risks, it’s important to consider alternatives. If you do decide that a hard money loan is right for your situation, search for a lender that offers you the most favorable terms.
Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
- U.S. Department of Housing and Urban Development, “FHA Single Family Housing Policy Handbook.” Accessed May 19, 2026.
- U.S. Department of Veterans Affairs, “Purchase Loan.” Accessed May 19, 2026.
