What is a Hard Money Loan?

A hard money loan is a type of short-term financing used primarily by real estate investors. The loan is secured by the property itself (the hard asset), and lenders focus on the property value rather than the borrower creditworthiness.

Hard money lenders are typically private individuals, investment groups, or specialty lending companies - not traditional banks. This allows them to move fast and fund deals that banks would not touch.

House flippers use hard money because they need to close quickly (often in 7-14 days), the property may not qualify for traditional financing (too distressed), and they plan to sell or refinance before the loan term ends.

Hard Money Loan Costs Breakdown

Points (Origination Fees)

Points are upfront fees charged as a percentage of the loan amount. One point equals 1% of the loan. Most hard money lenders charge 2-4 points.

Points are typically paid at closing and deducted from your loan proceeds.

Interest Rate

Hard money rates are significantly higher than conventional mortgages, typically ranging from 10-15% annually. Interest is usually calculated monthly and may be interest-only payments.

Other Fees

• Document/Admin Fees: $500-$1,500
• Appraisal/BPO: $300-$500
• Inspection Fees: $100-$300 per draw
• Wire Fees: $25-$50
• Extension Fees: 0.5-1% if you need more time

How Hard Money Loans Work

Step 1: Find a Deal

Most hard money lenders want to see a deal under contract before they will issue a formal loan approval. Have your purchase agreement ready.

Step 2: Submit Application

Provide information about the property, your renovation plan, your experience, and your exit strategy (how you will pay off the loan).

Step 3: Property Evaluation

The lender will order an appraisal or BPO (Broker Price Opinion) to verify the current value and your ARV estimate. They may also inspect the property.

Step 4: Loan Approval and Closing

Once approved, you can close in 7-14 days (sometimes faster). The initial draw covers the purchase price, with rehab funds held in escrow.

Step 5: Draw Requests

As you complete renovation work, you submit draw requests. The lender inspects the work and releases funds for completed items. This protects them from funding renovations that never happen.

Step 6: Payoff

When you sell the property or refinance, you pay off the hard money loan including remaining principal, accrued interest, and any fees.

Hard Money vs Traditional Loans

When to Use Hard Money

• Fix and flip projects - The classic use case. You need fast funding for a short-term project.
• BRRRR acquisitions - Fund the purchase and rehab, then refinance into long-term debt.
• Auction purchases - Auctions often require quick closing that only hard money can provide.
• Properties that wont qualify - Distressed properties may not pass conventional inspections.
• Self-employed investors - If your tax returns do not show enough income for conventional loans.

How to Choose a Hard Money Lender

Not all hard money lenders are created equal. Consider:

• Total cost - Compare points, interest, and fees across lenders
• Speed - Can they close in your timeframe?
• Draw process - How easy is it to get rehab funds released?
• Experience - Do they understand your market and property type?
• Reputation - Check reviews and ask other investors
• Extension policy - What happens if your project runs long?

Calculating True Hard Money Cost

Do not just look at the interest rate. Calculate the total cost including all fees: