A hard money loan is a short-term real estate loan from a private source, approved on the value of the property and the plan behind it rather than on the borrower’s tax returns. It closes in days, runs for months, and costs more than a bank loan in exchange for that speed. San Diego investors use one when the deal cannot wait, the property is not finished, or the borrower’s income does not read well on paper. Here is what the loan is, who funds it, when it wins, what it costs and how we close one.
What a hard money loan is
The word “hard” refers to the collateral, the hard asset that secures the loan. A hard money lender starts with the property: what it is worth today, what it will be worth when the borrower’s plan is done, and how much equity sits between the loan and a loss. Credit, income and experience are read, and they set the price, but they rarely decide the approval on their own.
Three features follow from that. The loan is short, because the lender is funding a plan with an end date. The payments are usually interest-only, because the principal is repaid at the exit rather than over decades. And the underwriting is fast, because the property is the main thing being underwritten. The guide to hard money loans covers every feature in depth; this article is the short version.
Who funds hard money loans
The capital behind a hard money loan comes from private sources: individual trust deed investors who fund one loan at a time and hold the note, mortgage funds that pool many investors and lend across many loans, and family offices lending from a private balance sheet. Some lenders originate to a formula so the loan can be sold on, and some brokers place loans with any of the above.
Which source is behind a quote explains its price and its behaviour. An individual investor prices deal by deal and moves as fast as the review; a fund prices steadily and decides through a small credit group; a conduit is efficient inside its box and unable to work outside it. Loan Goat works with capital from more than one source, which is how a hard money bridge loan on a property alone and a 30-year DSCR loan on a rental’s cash flow can come from the same team.
Five San Diego situations where hard money wins
Bank fallout. The buyer’s conventional loan is declined or delayed two weeks before closing, the deposit is at risk and the seller will not extend. A bridge loan that closes in days saves the purchase; the bank loan, or a long-term rental loan, comes later as the refinance.
The auction. A trustee’s sale or an online auction requires certified funds on the seller’s timeline and sells the property as-is. Investors arrange the money before they bid, either by raising cash from equity in other property or with a lender ready to fund the purchase immediately after the sale. The foreclosure auction page walks through it.
Value-add. A property that needs work does not qualify for a bank loan until the work is done. A fix and flip loan funds the purchase and the renovation in one, with the rehab money released in draws, and is repaid at the sale or refinanced when the property is finished and rented.
The cash-only listing. Some sellers will only look at offers with no financing contingency. A hard money pre-approval with proof of funds and a 5-7 day close competes with cash because it removes the two things the seller fears: a contingency and a long escrow. See cash offers only.
Timing. A 1031 exchange deadline, a partner buyout, a tax bill, a competing offer: any situation where the cost of waiting exceeds the cost of the loan. Private money is a tool for buying time, and for most of our borrowers the time is worth more than the rate.
What it costs
A hard money loan is priced in four parts: the interest rate, the origination points, the lender’s own fees, and the third-party costs of the appraisal, title and escrow. The rate is the headline; the other three decide whether the headline is true.
Loan Goat publishes a starting rate for every program that has one. Short-term programs start at 9.00% for bridge loans, 9.99% for fix and flip and 10.50% for the owner occupied bridge, and construction is priced per project; long-term rental DSCR loans start at 6.50% on the Non-QM tier and commercial loans at 7.90%. Those are floors for qualified borrowers, and the quote you receive moves from them with your leverage, the property’s condition, your track record and the strength of your exit. Points and fees are quoted on the term sheet for the deal. The pricing guide explains every part of the number.
How Loan Goat closes a hard money loan
Our process is four steps: complete your application, submit required documentation, sign your Letter of Intent, and we process and close your loan in 5-7 days. The speed comes from underwriting the property and the plan in-house, with fewer documents than a bank and no committee.
The application takes minutes. The documentation for most loans is the schedule of real estate owned, proof of funds, entity documents and whatever the plan requires: a scope of work and budget for a renovation, a rent roll for an income property. The letter of intent fixes the shape of the loan and starts the appraisal and title. Processing and closing follow. A complete file on day one is the biggest thing a borrower controls about how fast the loan funds; our hard money residential bridge program has closed in as quickly as 3 days when the file was clean.
When not to use one
Hard money is the wrong tool for a personal need, a permanent loan, or a deal that does not make money after the cost of the money. A homeowner who wants a 30-year fixed rate on a primary residence belongs at a bank or in an owner occupied program, not on a 12-month bridge. A borrower with no exit, no sale, no refinance and no other source of repayment, will be asked that question at every stage until it has an answer. And a project whose profit disappears once the rate, the points and the holding costs are subtracted has a bad deal rather than a financing problem, and the honest thing a lender can do is say so.
If the deal has a deadline, equity and an exit, it is probably ours. Request a quote or call (619) 617-2797 with the address, the amount, the purpose and the plan to repay, and we will tell you within a day whether the loan works. Everything else about borrowing from us is on the borrow page.
