Hard Money HELOC Loans: The Complete Guide

Hard money HELOC loans have become an increasingly popular option for real estate investors in recent years. But what exactly are they, and how do they work? In this complete guide, we’ll explain everything you need to know about utilizing hard money HELOC loans to fund your next investment property purchase or project.

What is a Hard Money HELOC Loan?

A hard money HELOC (Home Equity Line of Credit) loan is a specialty loan product offered by private lenders that combines features of both hard money loans and HELOCs. Like a traditional HELOC, it provides a revolving line of credit that can be tapped as needed up to a set limit. However, the loan is secured by the subject property rather than the borrower’s primary residence.

Similar to a hard money loan, hard money HELOCs are asset-based loans with higher interest rates and shorter repayment terms compared to conventional bank financing. They are popular among real estate investors who want flexible financing to purchase, renovate, or rehab investment properties.

Key Features of Hard Money HELOC Loans

Here are some of the key features that set hard money HELOCs apart from other real estate financing options

• Revolving credit line – Borrowers have access to a pre-approved line of credit that can be tapped repeatedly to withdraw and repay funds as needed.

• Secured by the investment property – The loan is secured using the equity in the investment property rather than the borrower’s primary residence. This allows investors to access funds without tying up home equity

• Higher LTV ratios – Hard money HELOCs commonly offer loan-to-value ratios between 60% to 80% of the property’s appraised value. Some lenders may go up to 90% LTV.

• Shorter terms – The draw period on a hard money HELOC typically ranges from 1 to 5 years. After the draw period the loan enters repayment.

• Variable interest rates – Interest rates are usually based on a benchmark rate plus a margin determined by the lender. Rates adjust periodically as the benchmark rate changes.

• Interest-only payments – During the draw period, payments only cover accrued interest charges, keeping payments low while allowing investors to tap funds as needed.

• No home equity required – Hard money HELOC loans don’t require you to have home equity built up already, unlike traditional HELOCs.

• Faster funding – Lenders can often fund the loans within a few days or weeks after approving the application.

How Do Hard Money HELOC Loans Work?

Hard money HELOC loans have a multi-step process, but the flexibility they provide makes them worthwhile for many real estate investors. Here’s an overview of how the loans work:

Application – The process starts by submitting a loan application and property information to a hard money lender. Quick pre-approvals are sometimes possible.

Property appraisal – The lender will order a third-party appraisal to determine the property’s market value. This sets the maximum loan amount.

Interest rate quote – After reviewing your application, the lender will extend an interest rate quote for the loan. Rates vary based on property type, location, and loan specifics.

Loan approval – Once approved, you’ll receive a loan agreement outlining the interest rate, fees, draw period, and repayment terms tailored to your situation.

Funding – After accepting the loan agreement, the lender disburses the approved funds to you according to the draw schedule and loan limits.

Interest-only payments – During the draw period, you’ll make monthly interest payments on the outstanding balance. As you repay amounts borrowed, those funds become available to draw again.

Draw period end – Once the draw period ends, the loan enters the repayment phase. No further funds can be borrowed, and principal and interest payments are required.

Full repayment – Regular monthly payments continue until the loan balance reaches $0 and the HELOC closes. There are no prepayment penalties.

Pros of Utilizing a Hard Money HELOC

Tapping a hard money HELOC line of credit provides several advantages for real estate investing:

• Access capital quickly – Have funds available in days or weeks to jump on time-sensitive deals or foreclosures.

• Renovation funding – Draw incrementally to complete repairs and improvements over an extended timeline.

• Purchase with less cash – The revolving credit provides more flexibility for investors with less cash on hand.

• Avoid multiple loan applications – The open line means no re-applying for new loans on each project.

• Build portfolio faster – Quick access to capital can accelerate your ability to purchase multiple investment properties.

• Tap equity without refinancing – Use the equity you build between purchases without undergoing full refinances.

• Interest savings – Only pay interest on what you actually borrow instead of your full approved limit.

• Tax advantages – Deduct interest expenses from investment property income for potential tax savings.

Cons to Keep in Mind

While hard money HELOC loans provide unique advantages, they do come with some downsides to consider:

• Higher interest rates – Rates typically range from 7% to 15% APR, significantly higher than conventional mortgages.

• Large payments if not interest-only – Principal and interest payments can be unaffordable for some investors if interest-only terms are not available.

• Short repayment timelines – Draw periods of 1 to 5 years mean your entire balance will become due quickly.

• Risk of declining property values – If the property value falls, your borrowing limit and equity can decrease.

• Variable rates – Unpredictable rate fluctuations may increase your long-term costs.

• Strict qualification criteria – Hard money lenders have stricter requirements for borrower qualifications and property viability.

• Prepayment penalties possible – Some lenders charge fees for paying off the loan balance before maturity.

• No bank financing – Hard money HELOCs come from private lenders, not conventional banks.

What Property Types Are Eligible?

Hard money lenders specialize in financing investment properties and are able to fund loans on more property types than conventional lenders. Common eligible properties include:

• Fix and flip houses
• Rental homes
• Small apartment buildings
• Vacation rentals
• Commercial buildings
• Raw land

Properties located in all 50 states can potentially qualify. Primary residences usually don’t meet lender eligibility guidelines for these types of loans.

What Credit Score is Required?

Credit requirements may be more flexible with hard money lenders than banks. Many will consider applicants with credit scores as low as 500. However, the higher your credit score, the better the loan terms you may qualify for.

Here are general credit score guidelines that borrowers should aim for with a hard money HELOC:

• 650+ credit score – Preferred rates and terms
• 600-649 credit score – Base eligibility for most lenders
• 500-599 credit score – Subprime loans with higher costs
• Below 500 credit score – Loan approval very difficult

Bringing in an equity partner with better credit is an option if your score falls below the typical approved levels.

How Much Can You Borrow?

Loan amounts on hard money HELOC loans depend heavily on the appraised value of the property securing the loan. The following factors also impact the approved draw amounts:

• Loan-to-value (LTV) ratio – Most lenders limit lending to between 60% to 80% LTV. Higher ratios up to 90% LTV are sometimes possible.

• Rehab costs – Additional funds above purchase price may be provided to cover renovation expenses.

• Loan term – Shorter draw periods equate to lower credit limits.

• Property type – Residential properties often qualify for higher LTVs than commercial.

• Borrower qualifications – Better credit and experience may increase LTV eligibility.

Typical HELOC limits range from $100,000 up to $5 million, although some lenders will exceed that maximum for the right deal.

What are the Repayment Options?

Hard money HELOC loans have defined draw periods ranging from 1 to 5 years during which minimum interest-only payments are required. Once the draw period ends, the loan enters full repayment.

Typical repayment options once the loan matures include:

• Full payoff – Make a lump sum payment to pay the balance in full and close the HELOC.

• Refinance – Qualify for new financing to pay off the hard money loan balance.

• Interest-only extension – Some lenders provide options to extend the interest-only period for an additional term.

• Principal and interest payments – Begin making monthly payments to pay down principal and interest over an amortization term until the balance reaches zero. Amortization periods are usually between 5 and 30 years. Payments are much higher than interest-only.

Many real estate investors opt to refinance with bank financing or another investment property transaction once the initial