You can find a hundred definitions online, but here's one we like: a hard money loan is finance provided by a non-bank lender against an investment property. So, if you own — or want to own — a property to sell or rent out, you can get money towards that property from a hard money lender by providing a lien against it.
Versus Traditional Finance
A hard money loan is similar to a mortgage, but it has to be for a "business purpose" — i.e. you're trying to make money from the property you own — and it has to be "non-owner occupied," so you can't live in the property whilst you have the loan in place.
Unlike a traditional mortgage, there are three key differences: speed, cost, and timeframe. A hard money loan is much faster to obtain — a few weeks or even days — rather than the months it often takes to get close a mortgage. But it costs a lot more: we'll dive into why below.
Finally, a mortgage is a long-term product, usually over 25-40 years, but a hard money loan is typically only for one year (but can range from 1 to 24 months). The one exception for this is a rental (a.k.a. DSCR) loan: if you want finance for a rental property, these usually come with 10- to 40-year terms, though with the option to repay early. However, unless the property you're buying is ready to rent out immediately, you'll need short-term financing to renovate the property first.
Versus Private Money
So, what's the difference between private money and hard money? In a word, nothing. Let us explain.
A while ago, "hard money" was a phrase used by non-bank lenders to distinguish themselves from banks. Rather than taking you through the arduous process of underwriting your credit, income and assets, they promised to provide finance determined solely by the "hard" collateral of the property you offered as security. (This is no longer the case, or arguably ever was, but we'll get to that further down.) On the other hand, "private money" was your local friend or investor who had money in their IRA they were willing to lend you.
Then, a weird switcheroo happened! Hard money lenders got big enough to start attracting Wall Street but came with a tarnished reputation. Through more than a few unsavoury dealings, the term "hard money" got a bad reputation synonymous with that of a loan shark. Keen to shake this, hard money lenders rebranded themselves as "private money lenders." After all, their source of capital was private, i.e. not on the public stock exchange. To add to the confusion, many individual private lenders have co-opted the term "hard money", and now nobody knows which is which.
We prefer to keep things simple, so we refer to lenders as hard money. However, if you're ever unsure which is which, here's a good question to clarify: ask whether they are an individual lender or a company.
You'll need to provide several things to a hard money lender to get approved for funding. Crucially, these differ from what you'll need to get approved for a mortgage: you'll notice we don't mention W2s or tax returns!
A Live Deal
Whereas mortgage providers will pre-approve you for finance before you find a house, hard money lenders rarely work that way — and if they say they will, it's often just lip service. With a mortgage, the critical risk is you: will you earn enough over the next 25+ years to pay back what you owe? With an investment property, the key risk is the investment, so the lender wants to see a property that can make enough profit off the sale — or enough net revenue from rental — to service the loan. A hard money lender can't go very far without a deal to underwrite. So before you apply for a hard money loan, you need a property you're ready to buy.
Downpayment
When starting, you will need a minimum 20% downpayment in cash to put towards the property. (If you're flipping homes, once you've got 2-3 flips under your belt, this requirement typically falls to 10%.) You'll also need an additional 5-10% of the property value available to put towards fees and closing costs and to show the lender you can service the first few months of interest.
FICO Score
We discuss this more in our Deal Breakers guide, but the highlight for now is that you ideally want a credit score of 660 or above. Most lenders do a hard credit search every six months, but even those who don't pull hard credit need to see evidence of your most recent score.
A Live LLC
Hard money lenders want to avoid falling afoul of consumer credit regulation, so they insist on lending to an LLC rather than to you personally. If you still need to form one, this need not stop you from applying, but it's worthwhile finding a closing attorney experienced with hard money lenders, and setting up an LLC, to speed up the process when you are ready to buy.
One thing that often surprises or frustrates investors is how much more expensive hard money lending is than traditional finance. This is down to two core issues: source of capital and risk. Whereas a mortgage lender gets their funds from consumer bank deposits, hard money lenders typically have investors in the background who are looking for a high return. The market views real estate investments as riskier than mortgages, so investors must be paid a premium in return.
Our perspective is to see hard money lenders as deal partners. They provide access to potentially fantastic returns when used right. And if you don't consider your hard money lender a good partner, we know plenty that would love to work hard to help you succeed!
Interest
As a ballpark, expect to pay around 12% interest (per year) on a short-term rehab, construction, or bridge loan. This may be higher on a risky asset or if you're new to investing. Or it may be lower — say 10.5-11% — when you're experienced. The good news is that this is short-term, and most short-term loans come with no prepayment penalty (or if they do, it's typically only in the first three months of the loan). The faster you get in and out, the higher your return.
With rental loans, the ballpark is 7-8.5%, with movement on either side depending on the property, downpayment and your credit score.
For a more detailed breakdown of interest, head to our Terms Guide or one of the specific Loan Type Guides.
Fees
In addition to interest, you will need to pay a set of fees. The biggest of these is usually your origination fee, due at closing, which amounts to 1-3% of your total loan amount. However, there are others you need to be aware of, too. We've broken all of these down for you in our Terms Guide, and each is summarised for you when you get offers on our platform.
This may sound like crazy advice from a hard money platform, but if you're new to real estate investing, hard money is probably not a tool you want to utilize yet — at least for your first deal. If you have 25-30% of the property value you're looking to buy and have some hands-on (e.g. contracting) experience, then you may be the exception. However, there is a high risk that you will go over budget and over time on your first project, and with the cost of hard money, you can lose money very quickly.
We suggest one of three routes: partner, house hack, or wholesale. Partnering looks like finding someone who's already done multiple investments and joint venturing with them on a project. They'll help you avoid the potholes they fell into and make it much easier to get approved for finance. House hacking is where you use traditional finance to purchase a home — which you'll live in — with the ultimate goal of renting or flipping it. You may have to live on a bit of a building site for a while, but it will allow you to learn at a more organic pace.
Once You're Ready
When you've cut your teeth and have a property ready to buy, hard money lenders are prepared to help. And we are ready to help you find them! Click on the 'Find Lenders' button to get personally matched to the lenders that are best for you.
