What Is a Hard Money Loan in Real Estate?

Are you considering a hard money loan to fast-track your next real estate investment? Whether you’re planning to flip a house or purchase a rental property, a streamlined hard money loan can be a helpful option.

These loans offer a unique financing solution, especially for those who might not qualify for traditional financing due to various reasons, such as a brief project timeline, limited upfront cash, or credit challenges.

If you’re not a professional investor but looking for a solution to bridge the buy-sell timing gap, we’ll also share an innovative way to tap into your home’s equity, allowing you to buy before you sell.

Here’s what you need to know to determine if these types of loans align with your investment and home-buying goals.

Editor’s note: This post is for educational purposes and is not intended to be construed as financial advice. HomeLight always encourages you to consult your own advisor.

What is a hard money loan?

A hard money loan is a type of short-term financing used in real estate transactions where speed and flexibility are more critical than the cost. The word “hard” in the phrase “hard money” refers to the requirement that the borrower have a tangible asset that acts as collateral to secure the loan.

This means approval relies heavily on the property’s potential and less on the borrower’s creditworthiness. As such, hard money loans can be an excellent resource for house flippers looking to purchase, renovate, and quickly sell a property at a profit. They are also a common financing solution for investors buying rental properties.

As with any secured loan, if a borrower defaults on a hard money loan, the lender can take ownership of the asset — such as a house — to make up for any losses.

How does a hard money loan work?

Here’s a quick overview of how hard money loans typically work:

Short-term loan: These loans have a shorter repayment period of 6-24 months, compared to a traditional 15- or 30-year fixed mortgage loan. Some lenders will allow a 12-month extension to give borrowers a combined 3-year term.
Faster funding option: When a property purchase needs to happen quickly, a hard money loan can be approved in a few days rather than the 30 to 50 days it typically takes to complete a mortgage loan.
Less focus on creditworthiness: Approval is not as heavily dependent on the borrower’s income or credit scores and history.
More focus on property value: This type of loan requires collateral, such as a home, to secure the loan and is focused on the ratio of the loan amount to the value of the property.
Not traditional lenders: These bridge loans are generally issued by individual investors or private lending companies rather than traditional banks.
Loan denial option: A hard money loan is often used by borrowers with poor credit who have been denied a mortgage application but have significant equity in their property.
Higher interest rates: Because the lender is exposed to more risk, hard money loans are typically more expensive than traditional mortgage loans. (See cost section below.)
Might require larger down payments: In some cases, borrowers may need a larger down payment, which may be as high as 20%- 30%, depending on the property’s value and the loan circumstances.
More flexibility: Hard money loans have less government oversight and regulation, allowing lenders to set more flexible credit score and debt-to-income (DTI) ratio criteria. They can also be used as a way to avoid foreclosure.
Potential for interest-only payments: Unlike a traditional mortgage, a hard money lender may allow you to initially make interest-only payments or arrange for deferred payments.