Guide to Hard Money Loans

Hard money is the loan you use when the deal cannot wait for a bank, when the property does not fit a bank, or when you do not. We have closed more than 1,300 of them since 2022, from San Diego to 46 states, and the questions borrowers ask before the first one are always the same. This guide answers them in order: what the loan is, why investors use it, what it costs, what the paperwork looks like, who it fits, who it does not, and how it ends. Where we quote a number, it is one we publish on a program page. Where the market’s numbers move too often to print, we tell you how to read them instead.

I. Introduction to hard money loans

What is a hard money loan?

A hard money loan is a short-term real estate loan from a private source, approved on the value of the property and the strength of the exit rather than on the borrower’s tax returns. It closes in days, runs for months rather than decades, and costs more than a bank loan in exchange for that speed and flexibility.

The word “hard” refers to the collateral, the hard asset that secures the loan, not to the terms. 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 cushion sits between the loan and a loss. Credit, income and experience are reviewed, and they move the price, but they rarely decide the approval on their own. That is the whole difference from a bank, where the borrower’s income comes first and the property is a detail.

Because the underwriting is simpler, the timeline is shorter. Our process is four steps: complete the application, submit the required documentation, sign your letter of intent, and we process and close your loan in 5-7 days. The loan itself is usually interest-only with a balloon payment at maturity, which means the monthly cost is low and the principal is repaid by the exit: a sale, a refinance, or a payoff from another source.

Why investors use hard money loans

Investors use hard money when time, condition or structure rules the bank out. Every one of our nine loan programs answers one of those three problems.

• Bridge loans: buying before selling, closing a purchase the bank cannot close in time, recapitalising a property, or pulling equity out to fund the next deal. Rates run from 9.00% to 13.00% on one or two year terms, with LTV up to 75% on residential and 70% on commercial and loans from $150,000 to $25,000,000.
• Fix and flip loans: buying a property that needs work, funding the renovation through draws and reselling. Rates run from 9.99% to 12.00%, up to 85% of the purchase and 100% of the rehab, loans from $250,000 to $10,000,000, and first time flippers are allowed.
• Construction loans: building from the ground up with flexible draws through every stage. LTC runs up to 80% including the lot, the build and the interest reserve, on terms of 12 to 18 months.
• Rental property loans: the long-term hold, qualified on the rent the property earns rather than on the owner’s income. Rental DSCR rates start at 6.50% with terms up to 30 years.
• Commercial loans: multifamily, mixed-use, retail, office and industrial in major metros on hybrid terms.
• Bank financing: bank statement, P&L-only and SBA programs for business owners outside the standard mortgage box.
• Owner occupied loans: Short-term bridge loans on the home you live in, from 10.50% at up to 70% of the purchase price, with VA Elite and VA IRRRL home loans for veterans.
• Second and third mortgages: junior liens behind an existing first when the equity is there and the first should stay in place.
• Blanket and cross-collateral loans: one loan across several properties when a single asset will not carry the deal.

The common thread is that each of these is a plan with a deadline. A bank underwrites a borrower; a hard money lender underwrites a plan.

The types of hard money lenders

There are five kinds of capital behind hard money, and knowing which one is behind your quote explains its price and its behaviour. They are individual trust deed investors, real estate investors who also lend, family offices, conduit lenders and mortgage funds.

1. Individual trust deed investors fund one loan at a time with their own money and hold the note, or a fraction of it, secured by a recorded deed of trust. They want a yield above what the bank pays them and a first lien on a property they understand. Our trust deed investing guide explains their side of the table.
2. Investor-lenders are operators who lend their own profits to other operators. They know the asset class, move fast on deals they recognise, and decline anything they do not.
3. Family offices lend from a private balance sheet. They can be flexible on structure and patient on term, and they tend to price steadily rather than deal by deal.
4. Conduit lenders originate to a formula so the loan can be sold to an institutional buyer. They are efficient inside the box and unable to work outside it.
5. Mortgage funds pool many investors into one vehicle with a target return, then lend across dozens of loans. Pricing is consistent, decisions are made by a small credit group, and structure can be creative.

Loan Goat works with capital from more than one of these sources, which is why we can fund a hard money bridge loan on a property alone and a 30-year DSCR loan on a rental’s cash flow under the same roof.

Hard money vs private money

In practice the two terms describe the same short-term, real-estate-secured loan written outside the bank system. Where a difference is drawn, hard money is priced on the asset and private money is priced on the relationship.

A hard money quote looks at the property first: value, condition, leverage, exit. A private money quote may come from an investor who knows you, has funded you before, and prices your next loan on that history. Our own hero line says we specialise in private and hard money loans, and we mean both: a first-time borrower with a strong deal gets an asset-based decision, and a repeat borrower with a track record gets the benefit of it. The difference in more depth is a short read; the pricing consequences are in our pricing guide.

Business purpose vs consumer purpose, and why it matters

The use of the money decides which set of laws the loan lives under. A business purpose loan funds an investment or a business; a consumer purpose loan funds the borrower’s personal, family or household needs.

Consumer purpose loans secured by a home carry the full weight of federal and state mortgage regulation: ability-to-repay rules, disclosure timelines, waiting periods and licensing requirements built for homeowners. Business purpose loans on investment property sit outside most of that, which is what makes a 5-7 day close possible. The test is not the property type and not the borrower’s job; it is what the money is for. A cash-out loan on a rental that pays for a new roof on that rental is business purpose. The same loan used to pay off personal credit cards is consumer purpose, and most hard money lenders will not write it.

Get this classification right on the first call. It decides which program applies, which documents are needed, and whether the loan can be done at all. We cover the two families in their own guides, on business purpose second mortgages and consumer purpose second mortgages.

II. Features of hard money loans

Pricing, rates, fees and closing 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 closing. The rate is the headline; the other three decide whether the headline is true.

Our published rates run from 9.00% to 13.00% on bridge loans, 9.99% to 12.00% on fix and flip and from 10.50% on the owner occupied bridge, with construction priced per project, commercial loans from 7.90% and long-term rental programs from 6.50% on the Non-QM tier. Those are floors for qualified borrowers, and the quote you receive moves from them with the same factors every lender weighs: how much equity you bring, what condition the property is in, what your track record shows, and how clear the exit is. Points and lender fees are quoted per deal on the term sheet. Third-party costs, the appraisal, title, escrow and recording, are paid to third parties and are broadly the same whoever the lender is.

Two features change the real cost more than the rate does. On a loan with a renovation holdback, ask whether interest is Dutch or non-Dutch: our fix and flip and construction programs are non-Dutch, with interest calculated on the drawing balance rather than on the whole loan from day one. And ask whether the loan carries a prepayment penalty or an interest guarantee; our bridge and fix and flip programs publish no prepayment penalties, which matters when the plan is to be out in six months. The full anatomy of a quote is in the pricing guide.

Appraisal requirements

Most hard money loans require an appraisal or a broker price opinion, and on a value-add loan the appraiser reports both the as-is value and the after repair value. Some faster, lower-leverage loans close on a site inspection and comparable sales instead.

The appraisal is the number the loan-to-value ratio is measured against, so it decides the loan amount. On a fix and flip, the appraiser is asked for two figures: the as-is value today and the after repair value once the scope of work is done, and the lender advances against the first and holds back against the second. Our hard money residential bridge program publishes that in some cases an appraisal is not needed; when the equity cushion is deep and the comparable sales are clear, an inspection can do the job and save a week.

Do hard money lenders verify credit?

Yes, hard money lenders pull credit, but above the published floor the score prices the loan rather than deciding it.

The bridge program lists a minimum credit score of 650, the fix and flip program a minimum FICO of 620 and construction 600. Above those floors, a default, a notice of default, a matured loan or a bailout is weighed against the equity and the exit rather than ruled out, because these loans are made on the property rather than on history. What the credit report tells any lender is how the borrower behaves under pressure, and that information is used to set the price and the leverage, not to close the door. We wrote a longer answer on exactly this question.

Do hard money lenders report to the credit bureaus?

Many private lenders do not report monthly payments to the three credit bureaus, because reporting is built for consumer lending and most hard money is business purpose. Ask your lender before you assume a loan will build, or damage, your score.

The practical consequence cuts both ways. A hard money loan paid perfectly for twelve months may do nothing for your credit file; a hard money loan that goes to foreclosure will show up in the public record regardless. Treat the loan as a business obligation with a business consequence, and treat your credit as something you protect separately.

Interest-only payments

Most short-term hard money loans are interest-only: the monthly payment covers the interest for that month and none of the principal, which is repaid in full at maturity. This keeps the carrying cost low while the plan is in progress.

On a $1,000,000 loan at a 9.00% rate, interest-only, the monthly payment is $7,500, which is arithmetic on a published rate rather than a quote. The principal is untouched until the exit, so the payment does not fall over time, and the balance does not either. Our rental DSCR program lists interest-only options too, for owners who want the lowest payment on a long-term hold; the short-term interest-only bridge program is built around them, with up to two six-month extensions if the loan is current.

Personal guaranty

A personal guaranty is the principal’s promise to repay the loan if the borrowing entity does not, and almost every hard money lender requires one when the borrower is an LLC or a corporation. It keeps the person behind the deal accountable for the deal.

Investors usually hold property in an entity for liability and tax reasons, and lenders are comfortable lending to the entity as long as the owner stands behind it. The guaranty is what makes the loan recourse in practice: if the collateral is sold at a loss, the lender can look to the guarantor for the shortfall. Non-recourse hard money exists, mostly on larger commercial loans at lower leverage, and it costs more.

Prepayment penalty and interest guarantee

A prepayment penalty charges you for repaying early; an interest guarantee requires a minimum number of monthly payments whenever you repay. Either one changes what a loan really costs on a fast exit, so ask about both before comparing rates.

Our bridge, fix and flip and construction programs publish no prepayment penalties. That is the right structure for a loan that is designed to be repaid early: a flipper who sells in month five should pay five months of interest and walk away. Where a lender does impose a guarantee, the usual reason is that the investors behind the loan need a minimum return to justify making it, and the borrower should price that guarantee into the deal like any other cost.

Interest reserve

An interest reserve sets aside part of the loan proceeds at closing to make the monthly payments for a period, so a property with no income during renovation or construction does not have to be carried from cash. The reserve is part of the loan and is repaid at the exit.

Our fix and flip and construction programs both list an interest reserve as available. It is worth using on any project where the property is empty while the work is done: the reserve lets the borrower keep liquidity for the unexpected, which is where flips go wrong, rather than sending it to the lender every month. The trade is a slightly larger loan balance at payoff.

Balloon payment

The balloon is the full remaining principal due at maturity on an interest-only loan. It is not a surprise; it is the loan. Planning for it is the same thing as planning the exit.

When a balloon comes due there are three ways out: sell the property, refinance into a new loan, or pay it off from other funds. Lenders extend loans that are current and progressing, usually for a fee, and some programs write the extensions into the note from the start. What a lender cannot do is turn a 12-month loan into a 30-year one on the day it matures. That refinance has to be planned, and it is one of the reasons we underwrite a short-term loan by asking whether it could be refinanced into one of our long-term programs if the sale runs late.

Exit strategy

The exit is how the loan is repaid, and every hard money lender underwrites it as carefully as the property. A loan with no realistic exit is a foreclosure with extra steps, for both sides.

Exits come in three forms, and each needs evidence rather than intention. A resale exit needs comparable sales of finished properties that support the after repair value with a margin to spare. A refinance exit needs a lender who will take the loan out, which for a rental means the property’s rent must support a long-term loan at the balance you will owe. A payoff from another source, a property sale elsewhere, a settlement, a capital call, needs a date and a document. Bring the exit to the first call and the rest of the underwriting goes faster.

The 70% rule

The 70% rule says a flipper should pay no more than 70% of the after repair value, less the renovation budget, for a property. It is a margin rule for investors, not a lending rule, but a deal that breaks it usually breaks the lender’s leverage caps as well.

The arithmetic is simple. If the finished property will sell for $1,000,000 and the renovation will cost $150,000, the rule caps the purchase at $550,000: seventy percent of the value is $700,000, and the budget comes off that. The 30% left behind is not profit; it covers financing, holding costs, selling costs and the surprises, and what remains is the profit. Our fix and flip program publishes up to 85% of the purchase and 100% of the rehab, which is generous, and the 70% rule is still the discipline that keeps a generous loan from becoming a thin deal. The LTV vs LTC vs ARV article walks through how the ratios combine.

Where others say no, we find a way. Here at Loan Goat, we don’t just offer loans. We build solutions. Because we know that every client’s situation differs, and cookie-cutter answers won’t cut it. Loan Goat

III. Important information about hard money loans

Should you work with a mortgage broker or a direct lender?

A mortgage broker places your loan with someone else’s capital for a fee; a direct lender funds it with capital it controls. Each has a job, and the right question for any lender is not the label but who decides, how fast, and what the whole loan costs.

A broker’s value is reach: access to programs and investors you could not find alone, and a packaged file that the lender’s underwriter can approve quickly. The cost is a fee and one more party in the chain. A lender that funds its own loans removes that layer and offers only its own programs. Ask three questions on the first call with anyone: who makes the credit decision, how many days from a complete file to funding, and what the rate, points, fees and prepayment terms add up to. The answers tell you more than the business card does.

Who is a good fit for a hard money loan?

Hard money fits borrowers with a plan, equity and a deadline. The five profiles below account for most of the loans we close.

• Rental property owners who need to buy, refinance or pull cash from a property faster than a bank moves, or whose tax returns do not show the income the bank wants to see. A bridge loan solves the timing; a DSCR loan solves the income question for the long term.
• House flippers who need purchase and renovation money in one loan, released in draws as the work is done. Our fix and flip program allows first time flippers, with a construction holdback of up to 100% of the rehab.
• Home builders with a lot, plans and a contractor who need ground-up financing with flexible draws. Our construction program lists two ground-up projects as the experience requirement.
• Land developers and investors buying at auction, out of a 1031 exchange, or on a listing that only takes cash offers, where the ability to close in days is the whole advantage.
• Self-employed borrowers and business owners whose returns understate their income, who qualify on the property under a business purpose loan or on bank statements under our bank financing programs.

Who is a bad fit for a hard money loan?

Hard money is a bad fit for a borrower with no exit, no equity, or no plan that makes money after the cost of the loan. It is also the wrong tool for a personal need dressed up as a business purpose.

A borrower who wants a 30-year fixed rate on a primary residence should be at a bank or in one of our owner-occupied programs, not on a 12-month bridge. A borrower who needs the loan to cover the down payment as well as the purchase is asking the lender to take all of the risk, and the answer from any lender is no. A borrower who cannot say how the loan will be repaid will be asked that question at every stage until it has an answer. And a borrower whose profit disappears once the rate, the points and the holding costs are subtracted has a bad deal, not a financing problem, and the honest thing a lender can do is say so.

Hard money and a damaged credit file

Above the published floor, a damaged credit file does not disqualify a business purpose hard money loan; it prices it and it lowers the leverage, and a past default or notice of default is weighed rather than ruled out.

What the lender needs in exchange for a weak credit file is a stronger everything else: more equity in the property, a cleaner exit, a track record on similar projects, and liquidity to make the payments. A borrower coming out of a bankruptcy or a foreclosure can be financed on the property’s equity while the credit file heals, which is the entire premise of a bankruptcy buyout or a bailout loan. What a credit score cannot do, good or bad, is substitute for an exit.

Five common mistakes to avoid

The loans that go wrong usually go wrong for one of five reasons, and every one of them is avoidable before closing. We wrote a full article on the five; the short version follows.

1. Not reading the terms. The rate is one line of a term sheet. The points, the fees, the prepayment terms, the extension terms and the draw process are the rest, and each of them changes the cost of the loan on your actual timeline.
2. No exit strategy. A loan that matures without a sale, a refinance or a payoff in place becomes an extension at best and a default at worst. The exit is planned before the loan is signed, not in month eleven.
3. Over-leveraging. Taking the program maximum on every deal leaves no room for a delay, an overrun or a soft resale market. Leverage is a tool, and the borrower with equity to spare is the one who survives a surprise.
4. Ignoring your credit. Credit does not decide the loan, but it decides the price and the leverage. A borrower who lets a file deteriorate between loans pays for it on the next one.
5. Overestimating the value. The after repair value is an opinion about the future. A borrower who builds a deal on the most optimistic comparable sale, or the cheapest contractor bid, is building it on the number most likely to be wrong.

Is hard money considered cash?

Not in the strict sense: a hard money loan is financing, and a purchase contract that requires cash means cash. In practice, a hard money pre-approval with proof of funds and a 5-7 day close competes with cash offers because it removes the two things sellers fear, a financing contingency and a long escrow.

Listings marked cash only, auction purchases and REO sales are where this matters. The borrower makes the offer with no financing contingency, backed by the lender’s letter and the borrower’s own proof of funds, and closes on the seller’s timeline. The risk moves to the borrower: if the loan does not fund, the deposit is at stake, which is why the loan is arranged before the offer and not after. Our cash offers only scenario page covers how to structure it.

Borrower requirements for a hard money loan

Our programs publish their requirements on each program page, and the fix and flip program lists the documents plainly: application, schedule of real estate owned and proof of funds. Beyond the documents, every lender is looking for the same four things.

First, equity: the down payment or the existing equity that keeps the loan inside the program’s leverage. Second, an exit: the sale, refinance or payoff that repays the balloon, with evidence. Third, liquidity: the cash to make the payments and to absorb the surprises, shown on bank statements. Fourth, a plan: the scope of work and budget on a renovation, the plans and permits on a build, the rent roll on an income property. Credit and experience are read alongside those four and set the price. A complete file on day one is the single biggest thing a borrower controls about how fast the loan closes.

How Loan Goat closes in 5-7 days

Our process has 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.

Step one is the application, which takes minutes and tells us the property, the loan amount, the purpose and the timeline. Step two is the documentation, which for most loans means the schedule of real estate owned, proof of funds, entity documents and whatever the plan requires. Step three is the letter of intent, the agreed shape of the loan, at which point the appraisal and title are ordered. Step four is processing and closing. We have closed hard money residential bridge loans in as quickly as 3 days when the file was complete and the title was clean; 5-7 days is the promise we make on every program.

The speed is not a slogan; it is the absence of the things that make banks slow. Less requirements, more closings. If you have a deal with a deadline, request a quote or call (619) 617-2797 and tell us the address, the amount, the purpose and the exit. That is enough to start.