What Is a Hard Money Loan and How Does It Work?
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Key takeaways
- Hard money is short-term (6–24 months), interest-only real-estate debt from private capital, secured by the property and underwritten on the deal rather than your income.
- Expect 8%–13% interest plus 1–3 points; speed (days, not months) and flexibility are what you are paying for.
- Loan size is capped by two rules: a percentage of cost (LTC) and a percentage of after-repair value (ARV) — you get the lower.
- It is a business-purpose product: investment property only, usually borrowed through an LLC with a personal guarantee.
- The loan ends in a balloon, so the exit — sale or refinance — must be planned before you close.
The one-paragraph definition
A hard money loan is a short-term loan secured by real estate and funded by private capital — an individual, a fund or a specialized lending company — rather than a bank. The lender's decision rests mainly on the “hard” asset: what the property is worth today, what it will be worth after the work you plan, and whether the numbers leave enough cushion if you default. Your credit and liquidity matter, but they set your pricing tier rather than decide approval. In exchange for taking collateral risk the bank will not, the lender charges a higher rate, origination points and a short maturity.
How a hard money loan works, step by step
- Deal submission. You present the property, purchase price, renovation budget, projected after-repair value (ARV), timeline and exit. Good lenders issue a term sheet within a day.
- Sizing. The lender applies two caps. Loan-to-cost: typically 80–92.5% of purchase plus rehab. Loan-to-ARV: typically 70–75% of the finished value. You receive the lower figure; the difference is your cash in the deal.
- Underwriting. A valuation (appraisal or broker price opinion), title search, entity documents, proof of funds, a credit pull and a review of your experience. For most residential deals this takes 5 to 10 business days.
- Closing. You sign a note, a deed of trust or mortgage, and a personal guarantee. Points, fees and sometimes an interest reserve are paid or netted from proceeds. The purchase portion funds; the rehab portion goes into a holdback.
- Draws. As work completes, you request a draw, the lender inspects, and funds are wired — usually within 24 to 72 hours.
- Payoff. You sell or refinance before maturity and repay the balance plus any accrued interest. Fix and flip loans rarely carry a prepayment penalty.
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What it costs in 2026
| Component | Typical range | Notes |
|---|---|---|
| Interest rate | 8.25% – 13% | Lower end: experienced borrowers, 720+ credit, strong markets |
| Origination points | 1 – 3 | 1 point = 1% of loan amount, paid at closing |
| Document / processing fee | $995 – $2,000 | Flat |
| Valuation | $300 – $900 | BPO cheaper than full appraisal |
| Draw inspections | $150 – $300 each | 3–6 draws on a typical flip |
| Extension fee | 0.5 – 1 point | Per 3–6 month extension |
On a $250,000, 12-month loan at 10.5% with 2 points, the financing cost is roughly $26,250 in interest if fully drawn for a year, plus $5,000 in points and about $2,500 in fees — call it $34,000, or about 13.5% of the loan amount. Most flips pay off in 5 to 7 months, which cuts the interest component roughly in half. Model your own deal in the hard money cost calculator.
Who uses hard money
- House flippers buying distressed property that will not pass a conventional appraisal or that must close in days.
- BRRRR investors who buy and renovate with hard money, then refinance into a 30-year DSCR loan.
- Builders financing infill lots and spec construction.
- Landlords needing a bridge to buy before selling, or to pull equity quickly.
- Self-employed and foreign-national borrowers whose income documentation does not fit agency guidelines.
- Commercial sponsors repositioning assets that cannot yet qualify for bank or agency debt.
Hard money vs. a bank loan
| Hard money | Conventional / bank | |
|---|---|---|
| Time to close | 5–10 business days | 30–60 days |
| Underwriting focus | Property and deal | Income, DTI, credit |
| Property condition | Distressed OK; rehab financed | Must be habitable; no rehab funds |
| Rate | 8–13% | 6–8% |
| Term | 6–24 months | 15–30 years |
| Points | 1–3 | 0–1 |
| Owner-occupied | No | Yes |
The decision is rarely about rate. If the property is finance-able by a bank and you have 45 days, use the bank. If the property or the timeline is not, hard money is often the only option — and the right question becomes whether the spread in the deal comfortably absorbs the financing cost. Read the full comparison in Hard money vs. conventional.
The risks nobody puts in the brochure
- Maturity risk. If the project runs long, you pay extension fees or face default. Build a 3-month cushion into your term.
- Valuation risk. A low ARV appraisal cuts your proceeds at the worst moment — after you are under contract.
- Draw friction. Contractors expect to be paid before the lender inspects; you need working capital to float a draw cycle.
- Personal guarantee. The LLC does not shield you from the note.
- Fee stacking. Points, doc fees, inspection fees, wire fees and extension fees add up; compare the total cost, not the headline rate.
How to qualify
Form an LLC, assemble proof of funds for the down payment and six months of interest, gather a scope of work with contractor bids, pull your own credit to know your tier, and document any past projects with HUD statements or closing disclosures. Then compare at least three lenders on total cost, draw speed and extension terms — not just the rate. Our funding request puts your deal in front of several vetted lenders at once.