Hard Money Loan
A hard money loan is a short-term, asset-based loan used to fund the acquisition and renovation of investment properties. The loan is secured by the property itself — lenders underwrite primarily on the asset (purchase price, ARV, rehab scope) rather than the borrower's income or credit. Approval is fast (days, not weeks), and terms are expensive — typically 10–13% interest plus 1–3 origination points.
Hard money is the default financing for fix-and-flip deals and the acquisition phase of BRRRR strategies. Speed and flexibility are its advantages. Cost is its drawback.
Key terms
| Term | What it means | Typical range |
|---|---|---|
| Interest rate | Annual rate, usually interest-only | 10–13% |
| Points | Origination fee as % of loan amount | 1–3 points (1–3%) |
| LTV | Loan-to-value on purchase price | 65–80% |
| ARLTV | Loan as % of after-repair value | 65–75% |
| Term | Length of the loan | 6–24 months |
| Extension fee | Cost to extend beyond the original term | 0.5–1% per month |
| Draw schedule | Rehab funds released in stages as work is verified | Varies by lender |
How the loan structure works
Hard money lenders typically split the loan into two components:
| Component | Amount | When available |
|---|---|---|
| Acquisition loan | 65–80% of purchase price | At closing |
| Rehab draw | 100% of rehab budget (disbursed in draws) | As milestones are completed |
| Maximum | Usually ≤ 65–75% of ARV | Overall cap |
The rehab funds are held in reserve and released as work is inspected and verified. You pay interest only on the drawn balance.
Worked example
Property: distressed single-family. Purchase price $130,000. Estimated rehab $45,000. ARV $230,000.
| Item | Calculation | Amount |
|---|---|---|
| Acquisition loan (75% of purchase) | $130,000 × 0.75 | $97,500 |
| Rehab reserve (100% of budget) | $45,000 | $45,000 |
| Total loan commitment | $142,500 | |
| ARV check (≤ 70% of ARV) | $230,000 × 0.70 = $161,000 | ✅ Passes |
| Origination fee (2 points) | $142,500 × 0.02 | $2,850 |
| Monthly interest (11% on $97,500 drawn) | $97,500 × 11% ÷ 12 | $893/month |
| Monthly interest (as draws are taken) | Increases as rehab funds are drawn | — |
7-month hold with full draws by month 2:
| Period | Avg. balance | Monthly interest |
|---|---|---|
| Month 1 | $97,500 | $893 |
| Months 2–7 | $142,500 | $1,306 |
| Total interest paid | ~$8,423 | |
| Origination fee | $2,850 | |
| Total financing cost | $11,273 |
That $11,273 is the cost of the speed and asset-based underwriting. Compare it to a 7-month hold on a conventional investment loan: at 7.5%, monthly payment on $97,500 ≈ $682/month → $4,774 over 7 months — roughly $6,500 cheaper, but conventional financing would take 30–45 days to close and requires full income documentation.
Hard money vs. conventional investment loan
| Factor | Hard money | Conventional investment loan |
|---|---|---|
| Underwriting basis | Asset (property) | Borrower (income, credit) |
| Approval time | 3–7 days | 21–45 days |
| Interest rate | 10–13% | 6.5–8.5% |
| Origination points | 1–3 | 0–1 |
| Rehab financing | Yes (draw schedule) | No |
| Term | 6–24 months | 15–30 years |
| Prepayment penalty | Rarely | Sometimes |
| Credit requirement | Lower (asset-based) | Higher (650–680+ FICO) |
Common mistakes
1. Not modeling the full financing cost. Beginners add up interest but forget origination points, extension fees, and the lender's required insurance (builder's risk or vacant property). Total financing cost is often $10,000–$20,000 on a typical flip.
2. Choosing the cheapest rate without checking the lender's draw process. A lender who takes 10 business days to inspect and release draws extends your renovation timeline — which adds holding costs that exceed the rate savings.
3. Underestimating extension risk. If the renovation runs long or the property does not sell quickly, you may need a 1–2 month extension at 0.5–1% per month. Always model what happens if you need one extension.
4. Using hard money for buy-and-hold properties. Hard money is designed for short holds. Using it for a rental that you intend to hold long-term (without refinancing) is expensive. Exit strategy must be clear before drawing the loan.
Frequently asked questions
Do I need good credit for a hard money loan? Hard money lenders care primarily about the deal — ARV, purchase price, rehab scope, and your exit plan. Most will work with investors who have credit scores as low as 600–620. Some asset-based lenders have no minimum credit requirement. However, experience and track record increasingly matter as deal size grows.
Can I use hard money as a first-time investor? Yes, though first-timers pay higher rates and may face lower LTVs as lenders account for inexperience risk. Having an experienced contractor or partner can improve your terms.
What happens if I cannot sell or refinance before the loan matures? You need to either extend (expensive) or refinance into a permanent loan. Have your exit strategy confirmed before you close. Do not assume a refinance will be available — DSCR requirements, appraisals, and seasoning requirements must all be met.
Is hard money the same as a bridge loan? Similar, but not identical. Hard money is typically more expensive and targeted at renovation projects. Bridge loans are often used by more established investors to span between transactions at slightly lower rates. The terms overlap significantly.
Hard money loan terms vary significantly by lender. Rates, LTVs, and draw requirements should be confirmed with your specific lender. This is not financial advice.