What Is a Hard Money Loan?

How do hard money loans work?

A hard money loan is a secured loan that provides fast access to cash — generally for property investors.

Hard money loans are similar to mortgages in that they use real estate as collateral. They’re more often used in investment real estate transactions — like with rental properties or house flipping.

Monthly payments are more expensive for hard money loans, so having rental income or a similar stream of money can help the borrower pay back the loan faster.

The application and approval processes for a hard money loan are faster than with traditional loans. These loans are also more flexible; they aren’t bound by the same rules and regulations as the traditional loan industry.

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, however, you’re likely to find other options that make more financial sense than a hard money loan.

Hard money loans vs. traditional financing

Hard money loans and traditional financing serve different needs and borrower profiles. 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 ratio analysis. These loans offer lower interest rates, longer repayment terms and higher loan-to-value ratios.

Hard money loans, in contrast, are primarily asset-based. Lenders focus more on the value of the property being used as collateral than on the borrower’s financial history. As a result, borrowers with poor credit may still qualify. However, this convenience comes with higher interest rates, shorter repayment terms and a requirement for a larger down payment.

For property investors or flippers who need fast access to capital and are confident in a quick resale or refinance, hard money loans can be a strategic option. For long-term homeowners or borrowers seeking stability and lower costs, traditional financing is generally the better route.

Hard money loan rates

Most hard money loans have much higher interest rates than traditional loans — sometimes as much as triple the rate.

Hard money loans 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%. LTVs for conventional home mortgages can be as high as 97% (requiring a 3% down payment), and some government-backed loans lend 100% of the purchase price of the home.

Once you’ve become an experienced flipper or rental property owner, your rates may become more favorable (which was true for one of our reviewers from Washington)  — especially if you continue to partner with the same investor.

Pros and cons of hard money loans

There are pros and cons regarding accessibility, convenience, cost and other factors to consider before you take out a hard money loan.

How to get a hard money loan

To get a hard money loan, you’ll first have to find a private 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 member to learn more. If you can’t find anyone local, consider a national lender or an online hard money lender.

Because hard money lenders don’t approve based on credit, you probably don’t need to worry about having a lower score and can compare as many options as you want. Instead, lenders are most concerned about the property that will secure the loan.

To get a loan, you’ll usually need between 30% to 50% 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.

To get a hard money loan, you might need between a 30% to 50% cash down payment.

To compare options from different lenders, 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. Once you’re approved, the lender disburses funds in as little as a week.

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.

For example, if you need a mortgage, the Federal Housing Administration backs FHA loans for borrowers with low credit (minimum of 500). These loans come with low down payment requirements and straightforward financial requirements.

For veterans, military service members and their surviving spouses, VA loans are a great option. These loans require no down payment and don’t require you to pay mortgage insurance.

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 the short repayment period. Because of the risks, it’s important to consider alternatives. If you do decide a hard money loan is right for your situation, search for a lender that offers you the most favorable terms.