Definition
Hard money loans are a form of private lending where the primary underwriting criterion is the value of the collateral (the property) rather than the borrower's financial profile. They are typically short-term (6-24 months), carry higher interest rates than conventional loans (10-15%+), and require lower LTV ratios (50-70%). Hard money lenders are private individuals, companies, or funds — not banks or institutional lenders. The key advantage of hard money loans is speed and flexibility. A hard money lender can often close in days rather than weeks, and they are willing to lend on properties or situations that banks would decline — distressed properties, borrowers with credit issues, or time-sensitive acquisitions. The trade-off is cost: higher rates, higher fees (2-5 points), and shorter terms. Hard money loans are most commonly used for residential fix-and-flip projects, land acquisitions, and situations where conventional financing is unavailable or too slow. For larger commercial transactions, bridge loans from institutional lenders often provide a more cost-effective alternative with similar speed and flexibility.
How It Works
A borrower identifies a property and contacts a hard money lender. The lender evaluates the property's value (often through a quick internal valuation rather than a full appraisal), calculates a maximum loan amount based on their LTV threshold, and provides a term sheet. Closing can occur in as little as 3-10 days. The borrower makes monthly interest payments and repays the principal at maturity through sale, refinancing, or payoff.
Example
An investor finds a distressed duplex for $300,000 that needs $50,000 in repairs. After repair value (ARV) is estimated at $450,000. A hard money lender provides $245,000 (70% of purchase price) at 12% interest with 3 points ($7,350) in origination fees for a 12-month term. Monthly interest payment: $2,450. After 6 months and $50,000 in repairs, the investor sells for $440,000. Net profit after all costs: approximately $95,000.
Why It Matters
Hard money loans fill a critical gap in the lending market for borrowers who need speed, are purchasing non-conforming properties, or cannot qualify for conventional financing. While they are more expensive, the ability to close quickly can mean the difference between winning and losing a deal in competitive markets. Understanding the difference between hard money loans and institutional bridge loans helps borrowers choose the most cost-effective financing for each situation.
H Equities
H Equities provides institutional-quality bridge loans that offer the speed of hard money with more competitive rates and terms, serving borrowers who need both flexibility and cost efficiency. Learn more
Frequently Asked Questions
How is a hard money loan different from a bridge loan?
Hard money loans are typically provided by private individuals or small firms for residential or small commercial deals at higher rates (10-15%+). Bridge loans are provided by institutional lenders for larger commercial properties at more competitive rates (8-13%). Both are short-term and asset-based, but bridge loans tend to offer better terms for qualified borrowers.
What credit score do I need for a hard money loan?
Most hard money lenders do not have strict credit score requirements because the loan is based on the property's value. However, some lenders may review credit as a secondary factor. Borrowers with poor credit can often still qualify if the property provides sufficient collateral.
What are the risks of hard money loans?
The main risks are high costs (rates, fees, and short terms) and the potential for loss if the exit strategy fails — if you cannot sell or refinance before the loan matures, you may face default and foreclosure.
Related Terms
Bridge Loan in Commercial Real Estate
A short-term loan (typically 6-36 months) used to "bridge" the gap between acquiring or repositioning a property and securing permanent financing.
Interest-Only Loan
A loan where the borrower pays only interest during the loan term (no principal reduction), resulting in lower monthly payments but a full principal balance due at maturity.
Loan-to-Value (LTV) Ratio
The ratio of a loan amount to the appraised value of the property, used by lenders to assess risk. Lower LTV means less risk for the lender.
Senior Debt in Commercial Real Estate
The first mortgage or primary loan on a property, holding the highest priority claim on cash flow and sale proceeds in the capital stack.
Permanent Financing in CRE
Long-term financing (5-30 years) for stabilized commercial properties, replacing bridge or construction loans with lower rates and amortizing payment structures.