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What Is a Hard Money Loan?
Hard money loans (aka, private money loans, bridge loans, or gap loans) are short-term, asset-based loans usually secured by real estate.
These loans can be used in a variety of real estate investment scenarios like fix-and-flips, 1031 exchanges, cash-out refinancing, construction financing, bridge financing, and much more.
Unlike traditional bank loans, which focus on your income, credit history, and debt-to-income ratio, hard money loans are based on the value of the underlying collateral asset.
The property type, location, and loan-to-value of the collateral property are the main factors hard money lenders use during the underwriting process to determine whether or not a loan is funded.
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Secured by Real Estate: Hard money loans are almost always secured by real estate, whether it be residential, commercial, mixed-use, or even vacant land in some cases.
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Hard Money Lenders: Are responsible for underwriting the hard money loans and accessing capital to fund the loans from:
- An investment fund that pools capital from investors
- High-net-worth individuals looking to diversify their investment portfolio
- Family & Friends
- Local business professionals like doctors and lawyers
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Shorter Duration: Hard money loans typically come with higher costs than traditional bank loans and have shorter terms, ranging from 6 to 24 months.
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Higher Costs: Interest rates can range from 8% to 15%, depending on location, property type, the borrower's financial strength, and current lending market conditions. They often come with a one-time upfront fee called origination points that are paid at the start of the loan, but not before the client receives the loan.
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Interest-Only Loans: Most hard money loans are interest-only; they are rarely amortized. This means that the monthly payments a borrower makes will only be applied toward the interest of the loan, not the principal amount. It is common for a borrower to make a balloon payment of the full loan amount before or at the time the loan is due.
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Flexible Qualifications: The asset being used as collateral is heavily weighed by hard money lenders during the underwriting process.
If the collateral is strong and a borrower’s story is compelling enough, even factors like bad credit and a poor financial history can be overlooked, unlike with big institutional lenders, where all the boxes must be checked to qualify for a loan.
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LTV: The loan-to-value ratio is the value of the property compared to the loan amount. Check below to see some examples of LTV scenarios.
What is an Interest-Only Loan?
Most hard money loans are structured as interest-only
- The borrower only pays the monthly interest during the loan term and not any part of the principal.
- The principal (original loan amount) is repaid in full at the end of the term in a balloon payment, typically through the sale of the property or refinancing into a traditional mortgage.
- Benefit: Keeps monthly payments lower while you focus on improving or flipping the property.
- Consideration: Private money lenders always want to know how they will be repaid. They will want to see a clear exit strategy from the borrower. Will the hard money loan be repaid via a refinance into a traditional bank loan, a sale of the property, the sale of a different property, or any other reasonable method?
Hard Money Loans vs Traditional Mortgage
Hard money loans and traditional mortgages are different types of loans. An HML is used for short-term scenarios, whereas a mortgage is generally used for a much longer scenario. Each option has distinct characteristics and suitability based on a borrower's circumstances. Here is a table of differences:
Hard Money Loans
20% to 30%
Little as 5 to 7 days
Minimal
7% to 15%
Not an important factor
6 to 24 months
Minor factor
Short-term
Interest-only
Not a critical factor
Not always necessary, but sometimes
Most critical factor
Below 75%
Very possible
Not important
1% to 5%
Usually 6 months
Mortgages
3% to 25%
6 weeks to months
Extensive
6.5%
Credit score of 600 or higher
15 to 30 years
Minimum of two years
Long-term
Amortized fixed-rate payments
Higher income can = better interest rate
1-2 months of mortgage payments
Important factor
Up to 97%
Rarely not possible
30% to 43%
0.5% to 2%
Often none
When to Use a Hard Money Loan
Hard money loans aren’t for every scenario — but they shine in certain use cases.
Fix-and-flip projects
- Purchase distressed properties, renovate quickly, and resell for profit.
- Lenders often fund both acquisition and rehab costs.
Bridge financing
- "Bridge the gap" between buying a new property and selling an existing one.
- Useful when traditional financing is delayed.
Cash-out refinancing
- Pull equity out of an existing property for another investment.
- Faster than refinancing through banks.
Construction loans
- Finance new builds or major renovations where banks may hesitate.
Auction or foreclosure purchases
- Auctions often require immediate proof of funds — hard money provides that flexibility.
Unique property situations
- Mixed-use, vacant, or non-income-producing properties often don’t qualify for conventional loans.
Why Real Estate Investors Use Hard Money Loans
Real estate is a competitive market, and many deals require swift action. Waiting 30 to 60 days for a traditional bank loan can mean losing an opportunity. That’s where hard money comes in.
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Speed of funding: Many lenders can close in as little as 3 to 10 days. Ideal for auctions, foreclosure purchases, or distressed deals.
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Flexibility on property type: Can fund properties banks won’t touch (vacant, unrenovated, mixed-use, or non-stabilized rentals).
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Less focus on borrower credit: Credit score matters less than the property value and equity. Good option for investors with limited credit history or recent financial setbacks.
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Competitive advantage: Offering “cash-equivalent” terms makes the offers more attractive to sellers.