Hard Money Loans: Everything You Need to Know

Tara Seboldt
Jul 27, 2022

The term “hard money loan” might sound like something out of an action movie, but it’s a real term for a type of financing.

Generally, hard money loans are short-term bridge loans so a borrower can get money fast. These loans rely on an asset—like an investment property—to secure the loan.

In this article, we’ll do a deep dive into what a hard money loan is, who is using them and where to get them.

We’ll also look at alternatives and why hard money loans aren’t often a good idea.

What is a Hard Money Loan?

Hard money loans are a type of loan provided by non-traditional lenders. They’re short-term loans that use collateral to secure the loan. The value of the loan is based on the value of the collateral.

The collateral is usually real estate, but it could be anything of value. For example, a borrower could use a car to secure a loan. If the borrower can’t repay their loan, the lender can seize the collateral property to cover the debt.

Hard money loans work in a shorter time frame than traditional financing such as mortgage loans. They generally have a very short—and often lenient—underwriting and approval process. Since the value of the property determines the loan amount, the borrower’s creditworthiness isn’t as big of a deal to lenders.

The loan repayment time frame is also significantly shorter than traditional loans. Unlike a traditional mortgage, most hard money loan terms require borrowers to repay the loan in only a few years.

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Who Uses Hard Money Financing?

Hard money lending is mostly found in real estate transactions. The most common borrowers are real estate investors and house flippers.

For example, house flippers might use a hard money loan to purchase a real estate investment property quickly in cash.

When the flippers sell the renovated property, they use the sale funds to pay off the hard money loan.

Real Estate Loans for Bad Credit

Some potential property buyers look to hard money lending if they can’t secure a traditional mortgage.

Unlike banks or other traditional lenders, hard money lenders don’t spend as much time looking at a borrower’s income or credit. They’re much more likely to approve a bad credit loan.

This can help homebuyers with low credit history qualify for a home loan.

For example, your situation makes it necessary to get into a new home quickly, but you don’t currently qualify for a conventional loan. You could use a hard money loan as a bridge for a year or two to build your credit while also securing your new home.

Business owners with poor credit can also use this method to secure office space or commercial property.

Who are Hard Money Lenders?

You won’t get a hard money loan from a bank or credit union. Hard money lenders are usually private investors or lending companies who specialize in this type of loan.

Banks and other traditional lenders have to follow specific regulations regarding lending. Hard money lenders, on the other hand, don’t have the same restrictions or regulations.

This can make getting a hard money loan easier than a traditional loan. Hard money lenders can generally be more lenient when approving loans. They have more wiggle room when choosing what credit score or debt-to-income ratio qualifies for their loans.

However, private money lenders could carry a lot more risk as a borrower. With less regulation, you’ll have to do more research to find a trustworthy lender.

Pros and Cons of Hard Money Loans

Hard money lending is sometimes grouped with predatory lending practices like payday loans. In reality, many hard money lenders don’t use predatory practices on borrowers. That doesn’t mean you should go get one, however.

Hard money loans generally have very specific uses. Using one without understanding the risks and costs could result in a lot of debt or the loss of your property.

Be sure to weigh the pros and cons of hard money lending before you decide to apply for a loan.

Advantages of Hard Money Loans

Depending on your plans for the property, hard money lending could help you get a loan quickly.

Some of the biggest benefits of hard money loans include:

  • Fast approval and closing process
  • Low credit requirements
  • Potential for more flexibility than traditional loans

Dangers of Hard Money Loans

Unless you’re an experienced real estate investor or flipper, hard money lending probably isn’t the best option.

While you might get a loan quickly, there are significant downsides to hard money lending, such as:

  • High interest rates
  • Lower loan-to-value (LTV) ratio, meaning you can’t finance the whole property
  • Higher upfront costs like down payments
  • Short repayment terms mean less time to pay off the loan
  • Foreclosure if you default on the loan
  • May not qualify without a successful record of real estate investing
  • Loans are higher risk than traditional mortgages

Alternatives to a Hard Money Loan

Hard money loans aren’t the right choice for most real estate buyers, especially those buying owner-occupied properties. Luckily, you have options to help you purchase the property you want.

Traditional Loans for Bad Credit

A borrower with bad credit may not qualify for a conventional mortgage. However, there are programs to help people with poor credit history purchase a home.

Consider reaching out to your local bank, credit union, or mortgage lender to ask about bad credit financing options. They may have programs to help you secure a loan, even if your credit isn’t ideal.

You can also spend time building your credit before looking for a loan. Things like secured credit cards or using a short-term, small-dollar loan can help you build credit fast to qualify for larger loans.

Peer-to-Peer Lending

Peer-to-peer lending is a financing method that connects individual borrowers with individual investors. Users use a peer-to-peer (or crowd lending) platform to facilitate the loan. The platform dictates the loan terms and handles the transaction and payments.

As a borrower, you might qualify for a loan with lower credit requirements on one of these platforms.

Borrowing from Friends or Family

If time is important to securing your property, reaching out to friends and family may be one of the best ways to get funding. Funds from your friends or family can still work as a bridge loan, but you won’t have to deal with potentially risky hard money lenders.

Just be sure you put your loan terms in writing. The last thing you want to do is ruin your closest relationships because of a misunderstanding.

The Bottom Line: Should You Get a Hard Money Loan?

In most cases, hard money loans aren’t a good idea for anyone except experienced house flippers or investors. They can be especially risky if you’re borrowing money for a non-real estate asset, like a car.

If you’re trying to buy a home, car, or other large purchase, look into alternative funding options.

You may have to put off your purchase to work on your credit score or save a bigger down payment, but the security of a traditional loan could be worth the extra time.

Tara Seboldt

Tara is a financial writer with over five years of professional writing experience. She previously worked at a financial planning firm. Tara uses this professional experience to help readers better understand their finances and make smart financial moves. When she’s not writing about money, Tara enjoys spending time in the Idaho mountains hiking, camping, and skiing.

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