What Is a Hard Money Loan?

By Timothy Moore · March 06, 2023 · 6 minute read

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What Is a Hard Money Loan?

A hard money loan is a nontraditional, secured loan provided by an investor to a buyer of a “hard asset,” usually real estate, whose creditworthiness is less important than the value of the asset.

Hard money loans are more common for real estate investments — purchasing a rental property or flipping a house, for instance — and can get you money quickly.

Individual investors or investment firms offer these loans. They typically have high interest rates and short repayment terms and can be risky.

Common Reasons to Get a Hard Money Loan

People typically look for hard money loans when they are interested in investing in real estate that needs repairs.

Amateur real estate investors who may not have another way of securing financing — or who may just need money fast — rely on hard money loans for:

•   Purchasing real estate to fix up and rent out

•   Buying a home to upgrade and flip for a profit

Business owners sometimes take out hard money loans to purchase commercial real estate as they expand their business.

Finally, some homeowners with poor credit but equity in a home may apply for a hard money loan to avoid foreclosure.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.


Recommended: How to Buy a Foreclosed Home

How to Get a Hard Money Loan

Unlike lenders of personal loans or traditional mortgage loans, hard money lenders aren’t all that interested in your credit scores. Instead, they care about the value of the investment — if you default on the loan, they’ll have made money on the interest and have legal claim to the investment.

That makes getting a hard money loan easier than a traditional loan. But how do you find hard money lenders if they’re not traditional direct lenders? Finding them could be as simple as asking a real estate agent or an industry friend (like another local landlord or house flipper) for a recommendation.

Hard money lenders are also online and accessed through mortgage brokers. It’s always a good idea to find trusted reviews of a lender before signing.

Recommended: Step-by-Step Mortgage Process

Hard Money Loan Requirements

Hard money lenders are less concerned about your credit scores than traditional lenders are, though they may check your credit and verify your income. Instead, there are three basic hard money requirements:

A Valuable Asset

The investment firms and financing companies that grant hard money loans are mainly interested in the value of the investment itself. A hard money loan is based on the after-repair value of a property.

Experience

Hard money lenders may want to know that you’re capable of completing the renovations you’re envisioning for your rental property or house flip. Being able to provide a portfolio of previous work may help your cause.

A Large Down Payment

Typically, hard money lenders require a down payment of 20% to 35%.

Hard Money Loan Rates and Terms

Hard money loans come with higher interest rates and shorter terms than traditional mortgage loans. This can make them higher risk for some borrowers.

•   Rates: Interest rates can range from 8% to 15%. This is higher than the typical 30-year fixed-rate mortgage.

•   Terms: In general, hard money loans come with short repayment periods. While most homebuyers choose a mortgage term of 30 years, hard money loans are often for six months to three years.

Recommended: How Rising Inflation Affects Mortgage Interest Rates

Pros and Cons of Hard Money Loans

So what are the advantages and disadvantages of hard money loans? Let’s break it down in easy terms:

Pros

Cons

Fast funding High interest rates
Fair credit usually OK Short repayment terms
Less stringent underwriting process Large down payment
Easy way to start investing Can’t work with traditional lenders

Hard Money Loan Alternatives

Hard money loans aren’t your only option if you want to start investing in real estate, though the condition of the property will be a factor, as will the size: Any multifamily property of five or more units requires commercial financing.

It’s important to consider every avenue and understand how it will affect your finances and the likelihood of getting an offer approved.

Traditional Mortgage

Properties that need structural repairs usually do not qualify for a conventional loan, but otherwise it could be possible to use a residential conventional loan for a property with up to four units if one unit will be owner occupied for at least a year.

The same is true for qualified borrowers of an FHA loan or VA loan.

Banks, credit unions, and mortgage companies also may offer commercial real estate loans to qualified borrowers.

Home Equity Loan or Cash-Out Refi

If you have significant equity in your home, you may be able to purchase an investment property by tapping your home equity with a home equity loan, home equity line of credit (HELOC), or cash-out refinance. Interest rates are typically lower, but your personal home serves as the collateral on the loan.

Personal Loan

Depending on the cost of the investment property, you may be able to cover the price with an unsecured personal loan — or a personal loan and cash reserves you may have.

Borrowers, depending on their credit score, may be able to secure financing for a lower rate than they’d get with a hard money loan.

A home improvement loan could also come in handy if you qualify.

The Takeaway

Hard money loans offer fast funding and don’t require a strong credit score, making them tempting for investment properties. But these loans — which are not available through traditional lenders — typically have high interest rates and short terms.

SoFi offers personal loans and mortgage refinancing and brokers a HELOC for up to 95% of home equity.

If you’re able to use traditional financing for a property purchase, consider a home mortgage loan from SoFi. Qualifying first-time buyers can put as little as 3% down on a principal residence.

Get your personalized rate today on a SoFi Mortgage.

FAQ

What is a hard money loan example?

Borrowers often seek out hard money loans for real estate investments. They may be interested in renovating a property to rent out or they may want to do a quick upgrade or more extensive rehab, then flip the home for a profit.

What are typical terms for a hard money loan?

Hard money loans typically require a down payment of 20% to 35%, come with an interest rate of 8% to 15%, and must be paid off within six months to a few years. This makes them high risk for some borrowers, but the fast funding and de-emphasis on credit history can be appealing.

Do hard money lenders run your credit?

Some hard money lenders may check your credit and verify your income, but in general, they are not as concerned with your credit scores as a traditional lender is. Instead, they want to see a large down payment, a history with rental properties, and an asset worth investing in, which serves as collateral for the loan.


Photo credit: iStock/Prostock-Studio

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