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What is a hard money loan? Plain answers for investors
A hard money loan is a short-term real estate loan based mainly on the property and the deal. Here is how it works, what it costs and when investors use one.
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A hard money loan is a short-term loan secured by real estate and made by a private lender, a hard money lender, rather than a bank. The lender sizes the loan mainly on the property: the purchase price, the repair cost and what the house will be worth when it is finished (the after-repair value, or ARV). Investors use hard money loans to buy and renovate houses quickly, usually for 6 to 18 months, and pay them off when they sell or refinance.
We are a Houston hard money lender. We fund 100% of the purchase and 100% of the rehab, up to 70% of ARV, and close in about 5 days.
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Estimate only. Loan amount is the lower of 100% of purchase plus rehab or 70% of the sale price when finished (after-repair value). Minimum loan $150,000. Business-purpose loans on investment property.
Hard money vs bank loans
| Hard money loan | Bank loan | |
|---|---|---|
| Based on | The property and the deal | Your income, debt and credit history |
| Speed | Days | Weeks to months |
| Term | Short, often 6 to 18 months | 15 to 30 years |
| Property condition | Distressed houses are fine | Usually must be livable |
| Cost | Higher rate plus points | Lower rate |
| Typical use | Fix and flip, bridge, quick purchases | Homes and long-term holds |
How a hard money loan amount is set
The lender compares your total cost (purchase plus rehab) with a share of the after-repair value and lends the lower amount. With us that is 100% of purchase and rehab, up to 70% of ARV.
| Example flip | Amount |
|---|---|
| Purchase price | $180,000 |
| Rehab budget | $60,000 |
| Total cost | $240,000 |
| After-repair value | $360,000 |
| 70% of ARV | $252,000 |
| Loan amount | $240,000 |
Try it in the hard money loan calculator.
What hard money loans cost
Hard money loans usually cost more than bank loans: an interest rate, often interest-only, plus points paid at closing. See hard money loan rates for typical ranges and what moves them.
When investors use hard money
- Fix and flip: buy, renovate and sell. See Houston fix and flip loans.
- Speed: to win a deal that has to close in days
- Distressed houses a bank will not lend on
- Bridge: short-term money until a sale or refinance
Pros and cons
| Pros | Cons | |
|---|---|---|
| Speed | Close in days | Less time to shop terms |
| Leverage | Can cover purchase and rehab | Capped by ARV |
| Approval | Based on the deal | Deal must have margin |
| Cost | Worth it on a good flip | Higher rate and points than a bank |
Questions investors ask
Straight answers about what is a hard money loan.
What is a hard money loan?
A short-term real estate loan from a private lender, sized mainly on the property's value and the deal rather than your income.
What is a hard money lender?
A private company or individual that makes short-term loans secured by real estate, usually to investors.
Why is it called hard money?
Because the loan is backed by a hard asset, the real estate, rather than mainly by the borrower's income and credit.
How long is a hard money loan?
Usually 6 to 18 months. Investors pay it off when they sell or refinance.
Do you make hard money loans in Houston?
Yes. We fund 100% of purchase and rehab, up to 70% of after-repair value, with loans from $150,000, and close in about 5 days.
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