Hard Money Loan: Pros and Cons

A hard money loan is a different way to get money compared to banks or credit unions. People mostly use it for real estate projects. These loans are quick to get, which is helpful when you need money fast for buying property or making investments.

Hard Money Loan

What Is a Hard Money Loan?

A hard money loan is a quick loan you get from private companies or investors that is secured by real property. It’s called “hard” because it’s backed by something valuable, like property. This is different from regular loans, where lenders look at things like your income and credit score.

How Does Hard Money Work?

Hard-money loans are easy to understand. You secure the loan using the property you want to buy or refinance. The loan amount depends on the property’s value, which acts as security. This makes the approval process quicker compared to traditional loans. So, investors can grab market opportunities promptly.

What to Expect From Hard Money Lenders

Hard money lenders do things differently compared to traditional loan lenders. If you’re considering working with one, here are a few things to keep in mind:

  • Similar to payday loans: Hard money lenders are similar to payday lenders who offer personal loans. They have less oversight or rules to follow.
  • Higher interest rates: Because hard money loans are riskier for the lender, they charge higher interest rates for borrowers. This is because they can set their rates based on the risk they’re taking.
  • Shorter loan terms: Hard money loans usually have shorter terms, lasting from a few months to a few years.
  • Different requirements: Hard money lenders set their own rules on things like credit scores and how much debt you have compared to your income.

Hard Money Loans Pros and Cons

Before you decide to work with a hard money lender, consider the pros and cons of this financing option:


  • Quick Funding: 24-72 hours
  • Flexible Terms: Interest-only, balloon payments, adjustable loan amounts
  • Less Emphasis on Credit Score: Focus on property value and potential profit
  • Higher LTV Ratio: Up to 80-90%
  • Shorter Loan Terms: 6-24 months
  • Streamlined Application: Less documentation and paperwork
  • Multiple Property Financing: Possible with hard money lenders
  • Interest-Only Payments: Reduces monthly expenses
  • No Prepayment Penalties: Refinance or sell without extra costs


  • High Interest Rates: Typically 8-15% or higher
  • High Fees: Origination fees, closing costs, and other charges
  • Short Repayment Terms: 6-24 months, requiring quick property flipping or refinancing
  • High Risk: Lender may foreclose if payments are missed
  • Low LTV Ratio: May require a significant down payment
  • Prepayment Penalties: Some hard money loans include penalties for early payment
  • Strict Loan Terms: Lenders may have rigid requirements and conditions
  • Limited Loan Amounts: Typically smaller loan amounts compared to traditional lenders
  • Collateral Risk: Property used as collateral may be seized if the loan is not repaid
Hard money loans are designed for short-term, high-risk projects, and the lender’s strict terms and high costs are reflective of this risk.

How to get a hard money loan

If you’ve saved up some money and decided to get a hard money loan, here’s what you need to do: Find a good hard money lender and apply for the loan.

1. Find a Hard Money Lender: Research and find a reputable hard money lender that suits your needs. You can search online, ask for referrals, or check with local real estate associations.
2. Check Eligibility: Ensure you meet the lender’s basic requirements, such as:
  • Property type (residential, commercial, or land)
  • Loan amount and LTV ratio
  • Credit score (some lenders may require a minimum score)
  • Income and employment history

3. Prepare Your Application:

  • Provide detailed property information (address, value, condition)
  • Share your investment plan (renovation, flip, hold)
  • Submit financial documents (income, bank statements, credit report)
  • Include a clear and concise loan request
4. Property Valuation: The lender will assess the property’s value, often through an appraisal or broker’s price opinion (BPO).
5. Loan Terms and Approval: The lender will present loan terms, including interest rate, fees, and repayment schedule. Carefully review and negotiate if necessary.
6. Loan Closing: Sign the final loan documents, and the lender will disburse the funds.
7. Interest-Only Payments: Make regular interest-only payments during the loan term.
8. Loan Payoff: Refinance or pay off the loan in full by the end of the loan term.

Additional Tips

  • Work with a broker: Consider using a hard money loan broker to help find the right lender and navigate the process.
  • Compare lenders: Shop around to find the best loan terms and fees.
  • Understand the terms: Carefully review the loan agreement and ask questions before signing.
  • Plan your exit strategy: Ensure you have a clear plan to refinance or pay off the loan by the end of the term.
Remember, hard money loans are short-term, high-risk financing solutions. Be prepared for higher costs and stricter terms.

Frequently Asked Questions

Who is a hard money loan best for?

The types of borrowers who tend to get hard money loans include:

  • Property flippers: Julie Aragon, a mortgage expert in Los Angeles, says that people who buy houses to fix up and sell at a higher price, called property flippers, often use hard money loans for financing.
  • Borrowers who don’t qualify for traditional loans: Sometimes, people can’t get a regular loan, like a 30-year loan from a bank, for a few reasons. Maybe they recently got divorced, which hurt their credit score, or they can’t show how much money they make. For business owners, it can also be hard to prove their income.
  • Homeowners facing foreclosure with substantial equity in their homes:  Sometimes, homeowners have a lot of value in their homes but might be in danger of losing them. If they can’t pay back their loan, hard money lenders might still lend them money if they’re sure they can sell the house, pay off the first mortgage, and make a profit.

What are the requirements to get a hard money loan?

To get a hard money loan, you must meet certain lender requirements. Some of the most common requirements include:

  • The lowest credit score allowed by the lender.
  • Keeping your debts relatively low compared to your income.
  • Paying a part of the loan upfront, usually at least 20%.
  • Documents showing how much money you make.

Are hard money loans risky?

Hard money loans are risky for both the person borrowing the money and the one lending it. They come with high-interest rates, short repayment times, and extra costs. This can make it tough for borrowers to pay back the loan.

Lenders also risk losing money if the borrower can’t pay back the loan, which might mean losing the property and losing money. These loans are seen as risky, so both borrowers and lenders need to think carefully about their money situation and what they want to achieve before going ahead with it.

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