Hard Money Loan – What it is and How it Works

A hard money loan is a specific type of loan that is secured by the collateral of real estate or other assets. These loans are typically short-term, spanning from a few months to a few years, and are commonly used by real estate investors or individuals who need quick funding or are unable to qualify for standard bank loans.

Unlike conventional loans, hard money loans prioritize the value of the property rather than the borrower’s credit history or financial standing. Consequently, interest rates for hard money loans are generally higher. The primary purpose of such loans is often to facilitate the acquisition, improvement, or development of a property to refinance with a conventional mortgage or sell the property within the short-term loan period.

Hard Money Loan - What it is and How it Works

In addition, hard-money lenders are known for their quick application and approval processes, providing a rapid source of capital for borrowers looking to seize time-sensitive opportunities in the real estate market. While these loans offer speed and flexibility, borrowers should be aware of the higher costs associated with the elevated interest rates.

How Does it Work?

The terms of hard money loans are predominantly contingent on the property’s collateral value rather than the borrower’s creditworthiness. Typically, traditional banks avoid hard-money lending. Instead, private individuals or companies often act as hard-money lenders.

In comparison to traditional mortgages, hard-money loans typically incur higher interest rates. In addition, the average interest rate for hard-money loans ranged from 10% to 18%.

However, interest rates ranging significantly higher prove notably more expensive compared to conventional mortgages, typically featuring rates between 4% and 5%. Furthermore, for the majority of borrowers, seeking a loan with a lower interest rate makes practical sense.

The main advantage of a hard-money loan is its speed. If time allows, exploring options like home refinancing or a personal loan with lower interest rates may be financially favorable.

What To Expect from Hard Money Lenders

Similarities to Payday Lenders

Hard-money lenders share similarities with payday lenders, who offer personal loans. Bruce Ailion, a real estate attorney and Realtor in Atlanta notes that both types of lenders operate with relatively little oversight or regulation.

Higher interest rates

Due to the increased risk borne by the lender, hard-money loans entail higher interest rates for the borrower. Additionally, lenders have the flexibility to set interest rates based on the perceived risk associated with the loan.

Shorter Loan Terms

Hard money loans typically feature shorter terms, spanning from a few months to a few years, reflecting the temporary nature of many real estate projects.

Different Rules

Hard-money lenders establish their requirements, including criteria related to credit scores and debt-to-income (DTI) ratios. This autonomy allows them to tailor their lending criteria to specific circumstances.

Examples of Hard Money Loans

Typically, property flippers utilize hard-money loans as a financial resource for potential projects. Nevertheless, hard-money loans can also be extended for various other purposes.

Wholesale Funding

Hard money loans are favored for wholesale flips due to their swift availability. Wholesale funding serves as a practical alternative to contract assignments, providing the advantage of keeping the financial spread between the buyer and seller undisclosed.

Property Flippers

Property flippers commonly turn to hard-money loans to finance upcoming projects, leveraging the property itself as collateral. Typically, the loan amount is calculated based on 90% of the purchase price plus 100% of the repair costs.

Renovate and rent

Similar to property flippers, some individuals opt for hard-money loans for projects aimed at renting out the property afterward.

Advantages and Disadvantages of a Hard Money Loan

Like any financial product, hard-money loans come with both advantages and disadvantages. On the positive side, these loans boast a quick and straightforward arrangement process and offer high loan-to-value (LTV) ratios. However, it’s essential to note that they also carry the downside of high-interest rates.

Advantages of a Hard Money Loan

Expedited Closing

Hard money loans can be closed more rapidly compared to traditional loans, primarily owing to the collateral involved.


These loans offer flexibility by bypassing the stringent underwriting process typically associated with traditional loans.

Minimal Emphasis on Financial Position

The borrower’s financial position is not the primary determinant of approval, making it accessible to a broader range of applicants.


The emphasis on collateral allows for less emphasis on the borrower’s creditworthiness, as the property itself serves as security.

Potential Lender Benefit

In the event of default, the lender may benefit if the collateral holds substantial value.

Disadvantages of a Hard Money Loan

Lower Loan-to-Value Ratio

Hard money loans frequently feature a lower loan-to-value ratio, emphasizing real property protection and limiting financing compared to the property’s overall value.

Higher interest rates

One notable drawback is the higher interest rates associated with hard-money loans, making them more expensive for borrowers.

Considerable Lender Risk

Lenders assume a significant level of risk, particularly if the borrower defaults or the property’s value depreciates.

Restrictions on Owner-Occupied Residences

Due to property rules and regulations, hard-money lenders may refrain from providing financing for owner-occupied residences, limiting the scope of potential borrowers.

How To Get a Hard Money Loan

Once you’ve secured a down payment and made the decision to pursue a hard-money loan, several essential steps are involved. The initial crucial step is to identify a reputable hard-money lender. Below are some of the most common methods to locate a reliable hard-money lender:

Research Online

Explore online resources and directories dedicated to hard-money lenders. Websites, forums, and industry-specific platforms often provide a wealth of information and reviews on various lenders.


Leverage professional networks and connections within the real estate and financial industries. Attend industry events, conferences, or local real estate meet-ups to connect with potential lenders and gather recommendations.

Real Estate Agents and Professionals

Consult with real estate agents, mortgage brokers, and other professionals in the real estate field. They often have valuable insights and recommendations based on their industry experience.

Local Real Estate Associations

Check with local real estate associations or investment groups. These organizations may have lists of reputable hard money lenders who are active in the local market.


Seek referrals from other real estate investors who have previously worked with hard-money lenders. Personal recommendations can provide firsthand insights into the lender’s reliability and terms.

Attorneys and Title Companies

Consult with real estate attorneys and title companies, as they often work closely with lenders. They may be able to recommend reputable hard-money lenders based on their professional relationships.

Online Reviews and Testimonials

Explore online reviews and testimonials from borrowers who have previously dealt with specific hard-money lenders. This can offer valuable information about the lender’s reputation and service quality.

Real Estate Investment Clubs

Join local real estate investment clubs where experienced investors share their knowledge and recommendations. These clubs can serve as valuable resources for connecting with trustworthy hard-money lenders.

By combining these approaches, you can gather a comprehensive list of potential hard-money lenders and make informed decisions based on your specific needs and preferences.


Real estate investors, developers, and property flippers commonly opt for hard-money loans. These loans offer a faster approval process compared to traditional bank loans, and their durations typically range from 6 to 18 months. Although these loans come with higher costs, the intention is to swiftly repay them, balancing out the overall expense.