What Is a Hard Money Loan and Are They Safe?

November 1, 2023 - 8 min read

If you can’t get a conventional loan due to a shaky credit history or because you’re buying an unconventional property, a hard money loan might be an alternative.

But while a viable substitute, these loans aren’t a one-size-fits-all solution for everyone. They cater to specific buyers like real estate investors and property flippers.

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What is a hard money loan?

A hard money loan is a safe, short-term unconventional loan that’s often used to finance investment properties or commercial real estate.

Unlike standard loans offered by banks or credit unions, hard money loans come from private investors or lending firms. They’re often considered an alternative or “last resort” for those who can’t get conventional financing.

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Conventional lenders rely heavily on the creditworthiness of borrowers. So if you have less-than-stellar credit or no credit history, you have a lower chance of qualifying for a traditional loan. Your chances also decrease if the property doesn’t meet a conventional lender’s criteria or if it needs significant repairs.

Hard money loans—which aren’t as strict and provide quicker access to cash—are tailored to real estate investors and property developers. For example, you might use a hard money loan to invest in a fixer-upper with the intent to renovate and sell for a profit.

These loans offer speed and flexibility, which is key in a competitive real estate market.

It’s important to note, however, that hard money loans often come with higher interest rates and fees compared to regular loans.

How do hard money loans work?

Rather than rely on a borrower’s credit history, hard money lenders place greater emphasis on the property itself. If the property has potential in terms of value, these lenders might approve this type of financing—even when a borrower’s credit history isn’t great.

These loans are designed for quick repayment and typically have shorter terms, ranging from a few months to a few years. The property acts as collateral (similar to a standard loan), so if you fail to repay the funds, the lender can take possession of it.

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Getting a hard money loan involves meeting specific requirements, and you might have to jump through a few extra hoops compared to a regular loan.

For example, whereas traditional mortgage loans might only require a down payment between 3% and 5%, a hard money loan requires borrowers to have more skin in the game.

These lenders will assess the value of the property and lend a percentage of its appraised value. Most hard money loans range from 65% to 80% LTV, so you’ll often need a minimum 20% down payment.

In addition, since these loans have a much shorter repayment term, your lender needs to know how you plan to repay funds. Real estate investors usually sell the property or refinance into a conventional mortgage before the end of their term.

Lenders also evaluate the property’s condition, location, and estimated value after any planned renovations. The property should have the potential to appreciate or generate income.

Even though credit scores matter less with hard money lending, a borrower’s experience in real estate or with property investment can influence a lender’s decision. Your knowledge in this area can increase their confidence.

Who offers hard money loans?

Hard money loans are typically offered by private investors or specialized lending firms, which is different from regular loans offered by banks and credit unions.

These private lenders are more willing to accept the risks associated with unconventional properties and less-than-perfect credit histories.

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To find a safe hard money lender, start by networking with real estate investors and property flippers. Additionally, real estate investment clubs, industry conferences, and online platforms that connect borrowers with private lenders are valuable resources.

Some real estate professionals like Realtors and mortgage brokers might also have information about reputable hard money lenders.

It’s important to do your due diligence on any prospective lender. This includes reading reviews, asking questions about loan terms, and making sure the lender is familiar with your local real estate market.

Pros and cons of hard money loans

Hard money loans offer a fast and flexible option for property financing, but the perks of these loans come with a few strings attached.

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Pros of hard money loans:

  • Quick funding: Hard money loans are typically approved and funded faster than traditional loans. This is helpful when you’re buying in a competitive market.
  • Flexible approval process: These loans focus more on the property’s potential than your credit history. It’s an alternative if you have credit issues and can’t qualify for traditional financing.
  • Property variety: Hard money lenders allow different types of properties, such as fixer-upper homes and commercial real estate.
  • Investor-friendly: If you’re a real estate investor or house flipper, hard money loans can provide the cash flow to fund your next project.

Cons of hard money loans:

  • Higher costs: The speed and flexibility of a hard money loan comes with a price. They often have higher interest rates and fees.
  • Shorter repayment: These loans are repaid quicker than a standard mortgage—usually within a few years.
  • Collateral risk: The investment acts as collateral for the loan. If you don’t repay funds, the lender can take the property.
  • Limited use: Hard money loans aren’t ideal for every situation. Given their higher interest rates, fees and down payment requirement, these loans aren’t for regular homebuyers looking to buy a primary residence.

The bottom line

Hard money loans offer a quicker way to get cash when investing in real estate—but not without costs. These loans have higher fees and short repayment terms, so they might not match your plans or budget.

To take the first step towards your investing goals, reach out to hard money lenders and explore your options.

Hard money loans FAQ

Are hard money loans a good idea?

The suitability of hard money loans depends on your specific situation and needs. These loans are typically used for short-term, real estate investment projects where traditional financing is not an option. They can be a good idea if you need quick access to capital, have a solid investment plan, and are prepared to pay higher interest rates and fees in exchange for fast funding.

What credit score is needed for a hard money loan?

Hard money lenders typically focus less on the borrower’s credit score and more on the value of the property being used as collateral. While they may require a minimum credit score, it’s often lower than what traditional lenders demand. Lenders are more interested in the potential value of the property and your ability to repay the loan.

Do hard money loans hurt credit?

Hard money loans themselves don’t directly affect your credit score. However, if you fail to repay the loan and the lender takes possession of the collateral property through foreclosure, this could negatively impact your credit. Always make sure you have a clear exit strategy for repaying the loan.

What is the difference between hard money and soft money loans?

Hard money loans are typically short-term, asset-based loans that use real estate as collateral. They often have higher interest rates and fees. Soft money loans, on the other hand, refer to traditional loans like mortgages or personal loans, which are based on the borrower’s creditworthiness and may have lower interest rates.

Is hard money the same as cash?

Hard money loans are not the same as cash. While they can provide quick access to funds, they are still loans that need to be repaid. The term “hard money” refers to the use of a tangible asset (such as real estate) as collateral, not the source of the funds.

What are the risks of hard money lenders?

The main risks of working with hard money lenders include the high cost of borrowing, as they typically charge higher interest rates and fees. Additionally, if you are unable to repay the loan, you could lose the property you used as collateral through foreclosure.

Valencia Higuera
Authored By: Valencia Higuera
The Mortgage Reports contributor
Valencia Higuera is a freelance writer from Chesapeake, Virginia. As a personal finance and health junkie, she enjoys all things related to budgeting, saving money, fitness, and healthy living.
Aleksandra Kadzielawski
Reviewed By: Aleksandra Kadzielawski
The Mortgage Reports Editor
Aleksandra is the Senior Editor at The Mortgage Reports, where she brings 10 years of experience in mortgage and real estate to help consumers discover the right path to homeownership. Aleksandra received a bachelor’s degree from DePaul University. She is also a licensed real estate agent and a member of the National Association of Realtors (NAR).