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Hard money loans are an ideal solution when traditional lenders aren’t an option. They provide fast, flexible financing for real estate investors who flip homes, renovate properties, or need to access cash from an existing property.
Compared to conventional mortgages, hard money loans offer three key advantages: speed, flexibility, and security.
Unlike traditional bank loans, hard money financing has different requirements and documentation, designed to make the process faster and more investor-friendly.
How to Know if You Qualify for a Hard Money Loan?
While there are numerous requirements needed to obtain a hard money loan, three essential conditions must be met.
Down Payment or Equity
Hard money loans require a larger down payment than traditional mortgages because they rely solely on the equity in the real estate being purchased, whereas traditional mortgages are supported by other assets.
To obtain a hard money loan, the minimum down payment for residential properties is typically 25% to 30%. Commercial properties are usually at the higher range, 30% to 40%.
Lenders may also allow borrowers to use multiple properties as collateral for one loan. This is called "cross-collateralizing."
A borrower's chances of being approved for a hard money loan increase with the more equity and/or down payment they have.
Financial Capacity
Hard money lenders will require a borrower to possess the financial resources to make the monthly mortgage payments and cover the property’s carrying costs.
Carrying costs, also known as holding costs, include expenses like property taxes, insurance, homeowners' association dues, and utilities.
Having sufficient cash reserves shows a borrower’s ability to make the aforementioned monthly payments and, therefore, increases the probability that a hard money loan will be granted.
When applying for a hard money loan, an applicant without any cash reserves will generally have a difficult time obtaining funding.
Under the circumstances, a borrower does not have any cash reserves, a hard money lender may withhold a portion of the funds to help cover the interest payments for a specific period of time, ranging anywhere from 4 to 12 months.
By withholding funds, the lender ensures payment for that set period of time, thereby reducing their risk.
Real Estate Investment Experience
Suppose the borrower is planning to perform a fix-and-flip or any type of renovation to the property. In that case, the lender will usually ask for the borrower’s experience in the field.
Borrowers without any experience will generally have a tougher time getting funding than seasoned professionals.
Veterans will also benefit from smaller down payment requirements and lower interest rates once they have established themselves as a proven commodity with a strong track record with the lender.
Individuals lacking real estate experience must present potential lenders with a comprehensive description of their plans for renovating the property and the expected sales price.
The lender will be very interested in the borrower’s exit strategy from the hard money loan because this is how the lender is repaid.
The two most common exit strategies are for the borrower to either sell the property or refinance into a conventional bank loan.
Common Hard Money Documents
Along with those three basic requirements, a borrower should also be prepared to provide various documents.
There are a variety of hard money loans, and each independent lender requires differing levels of documentation depending on their preferences.
However, there are a few standard documents that nearly all lenders require.
They are as follows:
Hard Money Loan Application
The borrower is responsible for initiating the hard money loan application process, which should include basic information such as
- type of hard money loan needed
- how the funds will be used
- type of property being used as collateral
- property location
- loan amount
- loan-to-value ratio
- borrower’s credit score
Unlike a traditional bank loan application, which requires a borrower to check many boxes, a hard money loan is surprisingly easy to apply for.
During the approval process the lender will also ask for a borrower’s basic financial information as well as information about the property.
Appraisal
A majority of lenders will want an appraisal done, helping to verify the value of the property.
The appraiser will likely be selected by the hard money lender and paid for by the borrower; this is normal practice.
Avoid wasting money on having your own appraisal; most lenders will not accept an evaluation.
Purchase and Sale Agreement
Like most real estate transactions, hard money loans involve a legally binding purchase contract known as a purchase and sale agreement, detailing all the terms of the transaction.
It spells out the rights and obligations of the buyer and provides a date by which the buyer will obtain financing.
The Purchase and Sale agreement also provides that the buyer makes a deposit equal to a small percentage of the sale price.
The deposit is held in escrow until a certain date or until the transaction is completed.
Proof of Income Documents
Proof of income documents, such as bank statements, federal tax returns, and W-2s, are perhaps the most important documentation since they show the borrower’s ability to make the monthly interest payments.
Deed of Trust
A Deed of Trust is only utilized in certain states and is prepared by a third-party trustee.
The Deed of Trust creates a lien on the real estate being used as collateral.
This document is registered at the county recorder's office where the property resides and provides public notification that the subject property serves as the collateral for a loan.
Since the Deed of Trust does not obligate repayment, the borrower must execute a Promissory Note.
Promissory Note
A promissory note states how much money is owed, when to repay the debt, plus the rate of interest for this loan.
Personal Guarantee
Giving a personal guarantee means that if the business is unable to repay the debt, then you are personally responsible for it.
This document is sometimes required by lenders, but not always.
Cost Estimate of Project
In some cases, a hard money lender finances both the cost of the property and the cost of the renovation.
In this scenario, the contractor performing the renovation must present an estimate of the total cost of the project.
Title Report
Hard money lenders like traditional banks require title reports.
A mutually agreed-upon title company, selected by the borrower and lender, will issue a preliminary title report indicating whether or not the property has a free and clear title.
The report will indicate any encumbrances on the property, such as mechanics' liens, tax liens, or loans.
Identification
Identification must be provided by the borrower.
In the event the borrower is a corporate entity, the lender is provided with articles of incorporation, licenses, and operating permits.
If the borrower is an individual, he must provide two forms of identification, usually a driver's license and a passport.
Mortgage Loan Disclosure Statement
Once a borrower has completed his loan application, he is given a mortgage loan disclosure statement, which spells out the terms of the loan, including all fees and charges.
Fair Lending Notice
The borrower is also given a fair lending notice stating that discrimination against a borrower due to race, religion, nationality, sexual orientation, or marital status is illegal.
The Bottom Line
Hard money loans provide a fast, flexible, and reliable way for real estate investors to fund purchases, renovations, and cash-out opportunities when traditional financing isn’t an option. By understanding the key requirements, essential documents, and how lenders evaluate borrowers, you can position yourself to secure the financing you need with confidence.
Whether you’re a seasoned investor or just getting started, knowing the ins and outs of hard money lending is the first step toward making smart, timely investment decisions.
Ready to take the next step? Contact Crescent Lenders today to discuss your project and see how a hard money loan can help you achieve your investment goals.
Ready to take the next step? Contact Crescent Lenders today to discuss your project and see how a hard money loan can help you achieve your investment goals.
Handpicked Resources
Hard Money Guide Hard Money
What is Hard Money? Hard Money
How To Find The Best Hard Money Lenders in California Hard Money
What Happens if You Default? Hard Money
Why Choosing a Local Los Angeles Lender Matters
Direct Hard Money Lenders
About the Author
Russell Barneson Hard Money Lending
Russell is a seasoned real estate investor, writer, and hard money lending strategist, as well as the co-founder of Crescent Lenders. He holds a degree from the University of Southern California’s Marshall School of Business. Outside of work, Russell enjoys surfing and spending time outdoors with his dog, Amy.