As a real estate investor, you may not have the luxury of getting approved for a traditional small business loan. Whether it’s a low credit score, a spotty payment history, or lack of down payment, you may find it challenging to find financing.
One option to consider: a hard money loan. Here, we share what hard money loans are, how they work, and where to find them.
Hard money personal loans allow real estate investors to quickly access financing for projects like flipping houses or purchasing rental properties. Unlike traditional bank loans that rely heavily on credit scores and debt-to-income ratios, hard money lenders focus more on the property’s potential value. This makes hard money loans ideal for borrowers who need fast cash but may not qualify for standard financing.
However, hard money loans come with some major drawbacks In this comprehensive guide, we’ll explain exactly what hard money personal loans are, how they work, their pros and cons, and alternatives you may want to consider
What is a Hard Money Personal Loan?
A hard money personal loan is a short-term asset-backed loan typically used to finance real estate investments like flips rehabs, and rental properties.
With a hard money loan:
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The loan is backed or “secured” by a piece of real estate put up as collateral. This real estate is often the property being purchased or renovated with the loan proceeds.
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Loan approval is based primarily on the property’s estimated after-repair value or ARV, not the borrower’s credit score and debt-to-income ratio.
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Loans are issued by private investors or companies, not banks or traditional lenders.
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Terms are usually 6-12 months with higher interest rates and origination fees than conventional mortgages.
Essentially, hard money lenders take on riskier projects and borrowers. In return, they can charge more in interest and fees.
How Do Hard Money Personal Loans Work?
The hard money loan process is much faster and less stringent than applying for a traditional mortgage. Here are some key steps:
1. Find a hard money lender
Many independent investors and private lending companies offer hard money loans. Online marketplaces like LendingHome also connect borrowers with hard money lenders.
2. Submit a loan application
You’ll need to provide details on the property, proposed renovations, and exit strategy. Hard money lenders may ask for limited documentation on your financials.
3. Lender evaluates and makes an offer
The lender will assess the deal based on the property’s estimated ARV. They want to ensure the property’s value exceeds the loan amount.
4. Close on the loan
If approved, you can typically fund in as little as 1 week. Costs like origination fees are higher than conventional loans.
5. Make interest payments
Hard money loans charge higher interest rates, often between 8-15%. You’ll make monthly payments on the interest during your loan term.
6. Repay the loan
When the property sells or your loan matures, you must repay the full loan principal balance and any outstanding interest.
Pros and Cons of Hard Money Personal Loans
Hard money loans offer speed and flexibility, but also come with major risks and costs.
Pros
- Fast funding in as little as 1 week
- Based on ARV, not personal credit or income
- Interest-only payments during loan term
- Can tap more property value than banks allow
Cons
- High interest rates from 8-15%
- Large origination fees up to 5% of loan amount
- Short 6-12 month repayment terms
- Must be an experienced real estate investor
- Risk of losing property if unable to repay
As you can see, hard money loans are better suited for experienced real estate investors comfortable taking on additional risk. Novice flippers often get into trouble misusing these products.
What Hard Money Loans Can Be Used For
Typical uses for hard money personal loans include:
House flipping – Hard money is ideal for financing flip projects that move quickly from purchase to resale. The short-term matches up with your project timeline.
Rental properties – Investors may use hard money loans for all-cash deals or to purchase rentals they plan to later refinance into conventional mortgages.
Rehabs – Hard money can fund renovations and repairs to distressed properties before selling for a profit.
Bridge financing – Borrowers can use hard money loans to bridge the gap between buying their next home before selling their current one.
Commercial properties – Hard money also funds commercial real estate like multi-family, retail, office spaces, and industrial properties.
The key is having a solid exit strategy to repay the loan through cash from flips, rents, refinancing, or property sales.
What to Look For in a Hard Money Lender
If you decide a hard money personal loan fits your investment strategy, it’s crucial to find the right lender. Here are some top tips:
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Check licensing & reputation – Choose an established lender with positive reviews and all required state licensing.
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Compare interest rates & fees – Shop around as rates and points can vary significantly between hard money lenders.
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Assess experience – Pick a lender with extensive experience in your specific type of real estate investment.
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Look for flexibility – Seek a lender who can structure terms to fit your project’s timeline.
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Review funding speed – For flipping, look for lenders who can fund loans in a few days to a week.
Taking the time to vet lenders upfront will help ensure a smooth financing process.
Typical Terms for Hard Money Personal Loans
While specific terms vary between lenders, hard money personal loans often share these characteristics:
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Loan amounts – Usually base lending amount on 65-80% of the property’s ARV. Can be as high as 90% with additional fees.
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Interest rates – Typically 8-15%, significantly higher than conventional mortgages.
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Origination fees – Up to 5% of the total loan amount. Also called “points”.
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Loan term – Often just 6-12 months so projects can be quickly resold and loans repaid.
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Payment structure – Interest-only with principal balance due at maturity.
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Prepayment penalties – Some lenders charge fees if you repay early.
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Collateral – The property and project being financed secures the loan.
Hard money loans sacrifice affordability for speed. Make sure you can handle increased costs.
Hard Money Loan Rates
As mentioned, hard money personal loans have much higher rates than traditional mortgages or personal loans from banks:
- Hard money rates – Typically 8-15%
- Conventional mortgage rates – Around 3-6% for prime borrowers
- Personal loan rates – Can be as low as 5-10% from online lenders
This results in substantially higher interest costs over your loan term. On a $100,000 loan, expect to pay $8,000-$15,000 in interest over 12 months at 8-15% rates.
Origination fees also drive up borrowing costs. It’s not uncommon to pay $5,000 in points on a $100,000 hard money loan.
How Much Does a Hard Money Loan Cost?
Let’s look at a sample breakdown of costs on a hypothetical $100,000 hard money personal loan:
- Loan Amount: $100,000
- Loan Term: 12 months
- Interest Rate: 12%
- Origination Fee: 5% of loan amount
Upfront Fees
- Origination Fee – $5,000 (5% of $100k)
Monthly Costs
- Interest – $1,000 ($100k principal x 12% annual rate / 12 months)
Total Interest Paid
- Monthly Interest = $1,000 x 12 months = $12,000
- Origination Fee = $5,000
- Total Interest & Fees = $17,000
As you can see, rates and fees can quickly add up with hard money loans. Make sure to accurately project costs into your deal analysis.
Hard Money Loan Qualification & Requirements
Hard money lenders focus more on the real estate asset and exit strategy than your finances. However, you still must meet some baseline requirements:
Credit score – Most lenders want at least 600. May accept 500-550 for strong deals.
Loan-to-value (LTV) ratio – Lenders look for 65-80% LTV based on the after-repair value.
Experience – Prefer some track record of completed flips or renovations.
Income & assets – Must have enough cash flow and reserves to make interest payments.
Collateral – You pledge the property and project as security for the loan.
Exit strategy – A viable plan to repay the loan at maturity through a sale, refinance or other means.
Even with hard money loans, lenders want to see you can successfully execute your project and repay the debt.
How to Get a Hard Money Personal Loan
Follow these steps when seeking a hard money personal loan:
- Find a property and create a project plan – Hard money lenders want to see detailed rehab budgets, ARV calculations
What Is a Hard Money Loan?
Hard money loans, also called bridge loans, are short-term funding used in real estate investment. The term “hard” refers to the hard asset — in this case, the property itself. Many investors use these loans to flip properties, and hard money lenders are private lenders (or private money lenders) looking for a high return without having to rehab or purchase a property themselves. They are most interested in the fundamentals of the deal: the property’s value or, in particular, the after-repair value (ARV).
The loan is based on what the lender believes the property will be worth in the future, which differs from traditional lenders who only look at the current value. So you may not need a good credit score to secure a hard money loan.
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How to Get 100% Financing With a Hard Money Loan
Not all hard money lenders offer the same types of loans to everyone. Hard money loans are a powerful tool for securing 100% financing, but not all borrowers will qualify. Here are a few ways to help ensure you get no down payment financing on your project.
- Make sure your deal is less than 70% ARV. Your ARV, or after repair value, should be less than 70%. That includes the property purchase price, rehab and loan costs.
- Maintain a solid credit score. While a good credit score is helpful to get a traditional loan, it’s also a good idea to have one for a hard money loan. You can still get a hard money loan with fair or poor credit, but you might not get 100% financing.
- Gain experience. Many hard money lenders won’t give money to borrowers if it’s their first time flipping a house. Having the experience of house-flipping can be in your favor.
- Be flexible in coverage. Some hard money lenders will cover the purchase price, but not other expenses (like repair costs, for example). You might have to cover some of the costs out of pocket (maybe business or marketing costs). With that being said, 100% financing might be different, depending on the lender.
- Consider the limit. Don’t be surprised if a hard money lender has a maximum loan amount you can get. If your property is worth more than the limit, you might be able to get the max loan amount, but not have it cover all your necessary costs.
How To Get A Hard Money Loan In 2024
FAQ
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