Private money is a precise tool. Used well it buys time, and time is what most real estate profit is actually made of. Used carelessly it turns a good deal into an expensive lesson. After more than 1,300 closed loans since 2022 the same five mistakes keep showing up, and every one of them is avoidable in the week before you sign.
Mistake one: not reading the terms
Borrowers read the rate and skim the rest. The rest is where the money is.
Four lines decide the true cost of a short-term loan. Whether interest is charged on the entire facility or only on funds drawn. Whether there is a prepayment penalty. What the extension costs and whether it is a right or a favor. And what triggers default, plus how long you have to cure it.
Our bridge and fix and flip programs publish no prepayment penalties, which means a project that sells in month five costs you five months of interest and nothing more. Our short term interest only bridge publishes one or two year terms with up to two six-month extensions while the loan is current, and that condition is worth understanding before you need it.
Read the term sheet in full, then read the loan documents, then ask about anything the two describe differently. A lender who is annoyed by that question is telling you something useful.
Mistake two: no exit strategy
A hard money loan is a bridge to something. If you cannot name the something, you do not have a loan, you have a countdown.
There are two real exits. A sale, supported by comparable sales for the finished product in that specific neighborhood. Or a refinance, supported by the numbers the takeout lender will actually use. For a rental, that means the rent and the debt service coverage ratio a long-term lender will calculate, not the rent you hope to get. Our rental DSCR program publishes terms up to 30 years and LTV up to 80%, and those bands are what a bridge exit should be measured against.
The test is simple. Have you spoken to the person who will provide the exit, or are you assuming they exist. Our post on the hard money exit strategy works through both routes properly.
Mistake three: over-leveraging
Maximum leverage is a tool, not a target. Our fix and flip program publishes up to 85% of the purchase and 100% of the rehab. Our bridge program publishes LTV up to 75% on residential and 70% on commercial. Those are the ceilings for the strongest version of a deal, and a deal written at the ceiling has spent its margin before the first invoice arrives.
Three things go wrong at maximum leverage. The monthly carry is larger, so every week of delay costs more. There is no equity to absorb a renovation overrun, so an overrun becomes a capital call on you. And there is no cushion if the finished value comes in below the projection, so the refinance shrinks and the sale has to cover a bigger loan.
The fix is unglamorous. Take less than the maximum, keep reserves you have not committed, and treat the difference as the price of sleeping.
Mistake four: ignoring your credit
Credit is not the decision in hard money, but pretending it is irrelevant costs money. Our published floors are a 650 minimum credit score on the bridge program, 620 minimum FICO on fix and flip and 600 on ground-up construction. Clearing a floor opens a program. Where you land inside it is set by the rest of the file.
Two practical points. First, the score you have today is the score the file gets, so pulling a new credit line or running balances up in the weeks before an application is a self inflicted wound. Second, disclose anything on the report before the lender finds it. A default explained on day one is a conversation. The same default discovered on day nine is a delay.
For borrowers whose credit genuinely is damaged, the floor is the floor: below it a program does not open, and above it a recent credit event is weighed against the equity and the exit. The full picture is in do hard money lenders check credit.
Mistake five: overestimating the value
Everything in a private loan is anchored to value, and value is where optimism does the most damage.
Two numbers matter and borrowers conflate them. The as-is value is what the property is worth today, in its current condition, and it sets the loan at closing. The after repair value is what it will be worth when the scope is finished, and it sets the ceiling on the whole project. Get the second one wrong and the error compounds through the budget, the leverage and the exit.
Three habits protect you. Use closed comparable sales of finished properties in the same immediate area, not listings and not a wider radius. Do not assume a finish level the neighborhood does not pay for, because over-improving is a real and common way to lose money. And expect the appraisal to be more conservative than your own number, because it usually is. Our post on how a lender values your property covers what the valuation actually looks at.
How our process catches each one
We publish our terms, our leverage bands and our documentation lists so there is nothing to discover late. We ask for the exit in the first conversation and we ask who is providing it. We size loans against the lower of the value and cost tests rather than the flattering one. We tell borrowers where their credit puts them instead of leaving them to guess. And we underwrite the value independently, which is occasionally an uncomfortable phone call and always a cheaper one than the alternative.
If you want a second opinion on a deal before you commit, the borrower FAQ answers most of the structural questions, and (619) 617-2797 gets you a straight read on the rest.
