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What Are Hard Money Personal Loans?

What Are Hard Money Personal Loans?
Sulaiman Abdur-Rahman
Sulaiman Abdur-RahmanUpdated March 29, 2024
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Hard money personal loans are high-risk lending products that are generally used to help purchase real estate or refinance a mortgage.  Banks and other traditional institutions do not offer them.Borrowers with poor credit scores and borrowers who prefer quick transactions may apply for hard money personal loans to buy buildings or land, including commercial, residential, and industrial properties.Hard money personal loan lenders may seize your property as collateral if you default on the loan. These hard money loans come from nonbank financial institutions or private investors. Below we provide more details and explain their pros and cons.

What Is a Hard Money Loan?

Hard money loans are unconventional lending products offered by nonbank financial institutions or private investors. They provide borrowers with quick financing to either buy real estate or refinance their existing home. A hard money loan is a collateralized loan product secured by the real estate it helped finance.Personal loan hard money lenders may quickly approve your hard money loan application if they see value in the property you want to buy or refinance. Borrowers with bad credit scores can apply for hard money loans, but lenders may seize the property as collateral if borrowers fail to repay the debt.

How Do Hard Money Loans Work?

Here’s a breakdown of how hard money loans work:

Typical rates

Hard money loans typically have rates of interest ranging between 10% and 18%. These rates are  high compared with the average interest rates for a 30-year fixed-rate mortgage that average 6.9% as of January 2024.

Fees

Hard money personal loans may include closing costs, administrative fees, and large down payments that equal 30% of the property’s value or greater. Some lenders may charge up to 10 points on the loan amount to reduce your interest rate. One point equals 1%, and 10 points charged on a $150,000 hard money loan would be $15,000.

Protections

Lenders may foreclose on your property if you default on the hard money loan. Lenders also may require borrowers to sign a personal guarantee that the loan will be repaid in full. Hard money lenders are generally regulated at the state level with less scrutiny than traditional banks, and borrowers may file complaints against these lenders if they find the loan terms unreasonable.Recommended: What Can Be Used As Collateral for a Personal Loan?

Typical Hard Money Loan Uses

Here are some ways you can use a hard money loan: 

House Flipping

Real estate investors can use hard money loans to engage in the practice of flipping a house. House flipping is buying a residential property and quickly reselling it for a profit.

Purchasing Commercial Property

Borrowers can use hard money loans to purchase commercial properties, including office space and strip malls. Commercial real estate loans can help small businesses expand their operations.

Buying Rental Property

Borrowers may use hard money loans to buy rental properties, including apartment complexes and other investment properties. Loans for rental property can also help small businesses expand.

Home Refinancing 

Homeowners can use hard money loans to refinance their properties. Hard money loans can help delinquent homeowners avoid foreclosure.

Land Development

Borrowers can use hard money loans to buy land for the purposes of development or redevelopment. Such loans can be used for rehabbing vacant properties. 

Pros and Cons of Hard Money Loans

Here are some pros and cons associated with hard money loans:
ProsCons
Applying for a hard money loan can be quick and simpleHard money loans feature high interest rates and significant origination fees
Borrowers with bad credit may qualify for a hard money loanThese loans may require large down payments
Hard money loans can provide individuals and businesses with quick financing for purchasing commercial propertyHard money loans may have short repayment terms ranging from six months to three years
Hard money loans may help delinquent homeowners avoid foreclosure through refinancingThe hard money loan agreement may require borrowers to sign a personal guarantee of repayment

Finding Hard Money Lenders

Finding hard money lenders is not as simple as going to the bank, because traditional banks do not offer hard money loans. Instead, you can find hard money lenders by searching for nonbank financial institutions or private investors who offer hard money loans. Personal loan hard money lenders may allow you to apply for hard money loans online. Some lenders may decide to approve or deny the application within 24 hours of receiving your hard money loan application.

Alternatives to Hard Money Personal Loans

Here are some alternatives to hard money personal loans:

Personal Business Loans

Personal business loans can in some cases provide small businesses and entrepreneurs with financing to expand their operations. 

Home Equity Loans

Home equity loans can provide homeowners with a lump sum of money to use for personal expenses. These loans function like a second mortgage because the financing comes from homeowners borrowing against the equity of their homes. 

Home Equity Lines of Credit 

Home equity lines of credit, also known as HELOC, are revolving lines of credit that allow homeowners to borrow against the available equity in their homes during a draw period that may run for several years. A HELOC can help homeowners finance large purchases.

Personal Loans

Traditional personal loans can provide borrowers with a lump sum of money to spend on home improvement projects, among other things. Banks and nonbank financial institutions may offer personal loans of up to $100,000 and provide you with further information on how they may serve your needs.

FHA Loans¹

The Federal Housing Administration insures a variety of loans, including a reverse mortgage program that allows homeowners age 62 and older to withdraw a portion of their home’s equity to supplement their income or buy new property. The FHA also insures mortgage loans that facilitate the construction or substantial rehabilitation of multifamily rental properties.Recommended: Personal Line of Credit Vs. HELOC

The Takeaway

Getting approved for a hard money personal loan or any other lending product can increase your debt burden. These loans are sometimes considered one of last resort.Borrowers in need of financing can explore their options.Lantern by SoFi has a user-friendly interface that can make comparing personal loan interest rates easy for all borrowers. All you need to do is provide basic information about yourself, and Lantern can guide you in the process of finding and applying for a personal loan you like.

Frequently Asked Questions

Do hard money loans require down payment?
Does a hard money loan go on your credit report?
What is the average interest rate on a hard money loan?
What can hard money be used for?
Photo credit: iStock/Giselleflissak
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About the Author

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman writes about personal loans, auto loans, student loans, and other personal finance topics for Lantern. He’s the recipient of more than 10 journalism awards and served as a New Jersey Society of Professional Journalists board member. An alumnus of the Philadelphia-based Temple University, Abdur-Rahman is a strong advocate of the First Amendment and freedom of speech.
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