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Hard Money Loans: What You Need to Know

Hard Money Loans: What You Need to Know
Susan Guillory

Susan Guillory

Updated November 10, 2021
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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.
If you’re looking to buy real estate and haven’t been able to qualify for other types of business loans, you may worry that you’re out of options. Maybe your credit score is low, which can mean you don’t qualify for a bank or SBA loan. Or maybe you’ve already overextended your credit with other real estate investments.You do still have one final option to consider: hard money loans. Just be mindful that these come with their own set of advantages and disadvantages.

What Are Hard Money Loans?

So, what is a hard money loan? While online business loans and bank loans come from traditional lenders, you get a hard money loan from a private individual or company, and the loan is backed by collateral. Typically, hard money loans are used to purchase real estate, and they may be used by people who want to flip a house, for example.

How Hard Money Loans Work

Now let’s review how a hard money loan works.There are some key differences between a traditional loan and a hard money loan.Traditional lenders may look at qualifications like credit scores, your revenues, and how much debt you carry. Hard money lenders care less about those qualifications, which means that loan applications can be processed much more quickly since there's less paperwork. Rather than waiting weeks to get your funds, you may get your money in  just days with a hard money loan. The most important qualifications to a hard money lender are the collateral you’re putting up and the size of your down payment. Typically you’ll need to make a larger down payment than you would with a traditional lender. Depending on the lender, the loan structure, and other factors, it can be anywhere from 10% to 50%. This is understandable, since a hard money lender takes on more risk loaning you money, particularly if your credit isn’t great.Recommended: Common Small Business Loan Terms

Pros and Cons of Hard Money Loans

Now let’s look at some advantages and disadvantages of hard money loans.

Pros

One of the biggest upsides to hard money loans is that, when you don’t qualify for any other type of financing, you still have the options of hard money loans. If you have a fantastic opportunity to buy a piece of real estate, a low credit score won’t hold you back from purchasing it.And while it might take weeks or even months to get a traditional loan application processed, approved, and then funded, you can typically get your cash within days with a hard money loan.Especially if you work with an individual who’s willing to lend to you, you may be able to work out flexible payment terms, which can help you manage cash flow.

Cons

The biggest drawback to hard cash loans is that these are short term loans. You’ll need a solid plan for how you’re going to pay back the money you borrow within a few years at most. Traditional mortgages can be 15 or 30 years, which typically means lower monthly payments. And because a hard money lender is taking on more risk than a traditional lender, you’ll pay higher interest. That can cut into your profits if you’re buying real estate to flip, and it can add to your monthly mortgage payment significantly.Finally, since the property you’re buying is your collateral for the loan, you risk losing it if you are unable to pay your mortgage. The lender has the right to seize and sell the property to recuperate losses.

Hard Money Loan Rates

Hard money loan interest rates will vary from one lender to another, and will also depend on how much you borrow and your qualifications. Here are a few examples of hard money loan rates, based on top results from a Google search for “hard money loan rates” in October 2021.
  • Longhorn Investments: start at 9.99%
  • RCN Capital: start at 7.49%
  • Groundfloor: start at 5.5%

Other Fees

It’s important to note that interest rates aren’t the only charges you’ll be paying. Other fees may include:
  • Appraisal fee: $425-550
  • Loan documents: $475
  • Admin fee: $500
  • Credit report fee: $40
  • Flood certificate: $15
  • Monthly servicing fee: $15*
*These examples are pulled from Longhorn Investments in October 2021, but other lenders may charge similar fees.

Getting a Hard Money Loan

Now that you know that hard money loans generally come with high interest rates and fees, you can make an informed decision. If you decide to go ahead, here’s how to get a hard money loan.Once you have a lender or lenders in mind, start by researching the loan-to-value (LTV) the lender requires. LTV refers to the amount of the loan compared to the value of the property. For example, you might see an LTV of 75%, meaning you will be required to make a down payment of 25% of the purchase price.Gather information about the property you want to purchase as well as details about all the real estate property you own and other mortgages you have. Fill out the application using the property you’re buying as collateral, and wait a day or two for the decision.Hard money loans tend to be processed quickly, so you may be able to close the deal within a few days.

Hard Money Loan Alternatives

Hard money loans are just one of several kinds of real estate loans for businesses. If you’ve got the time to work on improving your credit score and reducing your debt, you may qualify for other types of loans like the following.

Commercial Mortgages

If you qualify for a loan through a traditional lender, you can get long repayment terms and low interest.

Construction Loans

If you’re building on land, there are both short- and long-term loans for this, though they may require a higher down payment.

SBA 7(a) Loans

If your credit is good, you may qualify for a loan backed by the Small Business Administration (SBA). If you need to borrow under $25,000 there are no collateral loans as available.

Applying for Business Loans

Whether hard money loans are the right fit for your business or not, comparing small business loans and rates is always a smart idea. Lantern by SoFi can get you multiple offers from different lenders in seconds.
Photo credit: iStock/fizkesThe tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC1021199

Frequently Asked Questions

What are examples of hard money loans?
How much do you have to put down on a hard money loan?
Why is it called a hard money loan?

About the Author

Susan Guillory

Susan Guillory

Susan Guillory is the president of Egg Marketing, a content marketing firm based in San Diego. She’s written several business books, and has been published on sites including Forbes, AllBusiness, and Cision. She enjoys writing about business and personal credit, financial strategies, loans, and credit cards. Follow her on Twitter @eggmarketing.
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