A Guide to Hard Money Loans

David Cohn
February 10, 2021
Hard Money Loans

Commercial Hard money loans are widely used in commercial real estate because they are generally easier to get than conventional loans. However, they can be expensive. To succeed, you have to understand how and when to use them.

We’ve put together this blog to guide you on doing exactly that. Here we will discuss all the basics you need to know about hard money loans for commercial real estate, including:

  • What exactly is hard money?
  • What is a hard money lender?
  • What types of properties/deals is it appropriate for?
  • What are the hard money loan requirements?
  • What interest rates and LTV should you expect?
  • Where can you find an experienced and reputable hard money lender?

Hard money can be a beneficial tool for investors who know what they’re doing. This guide should provide all the important things you need to take advantage of this financing tool. Let’s get started!

What are Hard Money Loans?

Hard Money Loans are

short-term loans that are secured by real estate (usually commercial real estate). These loans are funded by private investors instead of banks, credit unions, and other traditional lenders.

Hard money loans are short-term loans that are secured by real estate (usually commercial real estate). These loans are funded by private investors instead of banks, credit unions, and other traditional lenders. The usual term is 12 months, but loan terms may be extended to 2 and even five years.

The monthly payments for these loans are comprised of just the interest or the interest and some principal. At the end of the term, a balloon payment has to be made.

The word “hard” refers to a hard asset. When you take out a hard money loan, the lender secures their interest with hard collateral, which means real estate property.

Hard money is often described as a “last resort” loan, but this is not accurate. While this loan tends to have shorter terms, they’re not just used when all else has failed.

Many astute commercial real estate investors—particularly those who focus on fix and flip investments—use these loans as a regular part of their overall financing strategy.

What is a hard money lender?

A hard money lender is simply a private investor (an individual or a group of investors) that can provide rapid loans collateralized by hard property.

The words “hard money lender” often conjure up images of shady loan sharks who do business in obscure alleys and charge impossibly sky-high interest rates. This might have been true in the past, but it’s certainly not the case these days.

Some bad apples did tarnish the hard money lending industry a few years back when a handful of predatory lenders attempted “loan-to-own” agreements. They provided extremely risky loans intending to foreclose on the properties used as collateral.

Luckily, these shady hard money lenders no longer exist in the market today. However, some residual stigma remains for some investors who haven’t recently used the services of reputable and professional hard money lenders.

Don’t worry. As long as you work with a trusted commercial finance specialist, you can be confident that you are dealing with an honest provider of hard money for commercial real estate.

The deal will be thoroughly reviewed to ensure that it is fair and doesn’t put one party at a disadvantage. Hard money lenders—whether individual investors or commercial finance companies—are also carefully vetted.

How are hard money lenders different from traditional lenders?

A bank or any other traditional lender is primarily concerned with the borrower’s credit. A hard money lender, on the other hand, focuses on the property’s value. They might still look at the borrower’s credit and financial fitness, but their primary basis for approving or denying a loan is the worth of the property used as collateral.

Thus, the amount the hard money you can get from a lender is primarily based on the subject property’s value. These lenders are more interested in the actual asset—not on the borrower who borrows against this asset. Because of this, hard money loans can be more expensive compared to standard bank loans.

Are There Hard Money Loans for Bad Credit?


Borrowers who don’t qualify for conventional financing due to events that banks see as red flags—such as a recent short sale or foreclosure—may still be able to get a hard money loan provided that they have enough equity in the property used as collateral. In many cases, hard money lenders say “yes” when banks say “no.”

What Property types can you use Hard Money Loans for?

You can take out a hard money loan on any type of real estate, including residential single-family homes, multifamily properties, land, commercial, and industrial.

Hard money lenders are usually more open to various types of real estate investments. In contrast, banks tend to have strict criteria for conventional mortgages—especially if you intend to buy an investment property.

Getting approved for a bank loan is almost impossible if you have acquired over ten real estate assets in your name and don’t qualify anymore for Fannie Mae-backed financing.

Most banks are interested only in cookie-cutter owner-occupied properties that can be hard to make money on. This is why seasoned real estate investors find hard money to be extremely useful.

If you’re a CRE investor, you can certainly find hard money lenders that focus on multifamily apartments, industrial property, retail, and commercial office buildings, to name a few asset classes.

Do note that some lenders specialize in specific property types and refuse to do other loans they don’t have experience in. Some hard money lenders only work within a specific niche in which they have expertise.

Ask right away what loans they are willing to do so that you don’t waste time. You can also consult with a commercial finance consultant to get access to hard money lenders interested in the types of projects you do.

How Should Hard Money be Used?

Hard money is not the best option for all kinds of deals. Suppose you intend to buy a primary residence and you have relatively good credit and solid income history, with no prior issues such as a recent foreclosure or short sale, and you have enough time to fulfill a traditional lender’s rather lengthy application process and a long list of requirements. In that case, you may be better off using conventional bank financing.

However, hard money makes sense when traditional lenders are not an option or need the loan fast. They may be useful in situations like the following:

  • Land loans
  • Fix and flips
  • Construction loans
  • If you have credit issues
  • If you want to act on investment quickly before someone else can buy it

The good thing about hard money is that it can give you the funding you need much faster than a bank loan. It can be extremely useful if you’re interested in acquiring an asset that attracts a lot of competing bids.

With a hard money loan, you can offer the seller a quick close, showing your seriousness and setting your bid apart from buyers who will use slow conventional financing.

A hard money loan can also be a good option if the bank rejected your application for a conventional loan. Perhaps you have a recent foreclosure or a short sale, a low credit score, or perhaps you don’t have an income history because you just started a new job.

Banks routinely deny loan requests even by borrowers who make a healthy income but can’t produce sufficient income history. A hard money lender can look past these factors as long as you have enough equity invested in the real estate asset, and the loan can be repaid.

How Fast is a Hard Money Loan?

In most cases, hard money loans are granted within a week. Meanwhile, bank loans typically take 30 to 45 days (sometimes longer). The hard money application process generally takes just one day, and, in some cases, loans are funded on the same day. This is why CRE investors rely on them for deals that need to be closed quickly.

How fast is a hard money loan?

What are the Usual Terms of Hard Money Loans?

The standard hard money loan terms are expensive compared to conventional financing. But these short-term loans can still be absorbed with a lot of room for profit. Different hard money lenders have different terms, but you can expect the terms to look like this:

• Interest Rate: 12% to 16% percent
• Loan to Value/Loan to Cost: 65% to 85% percent
• Term: 6 months to 1 year
• Points: 2-6
• Prepayment penalties: usually none

Other Fees (depending on the lender):

• Application fee
• Appraisal fees (ranging from $400 to $650, and substantially more if the asset is a commercial or multifamily property)
• Broker’s Price Opinion (usually ranging from $150 to $250)
• Title fees
• Document processing fees
• Inspection fees

Rates vary from lender to lender and from region to region. In general, hard money loans in California have lower rates than other parts of the US because there are many hard money lending firms in the state. This increased competition causes prices to decrease.

You may be wondering: Why are commercial hard money loan interest rates so high? That’s because lenders take on a lot more risk than what a bank will take on in a conventional loan. Higher interest rates offset this higher risk. The actual rate will depend on the perceived risk and the specific lender. It is also affected by the loan to value ratio.

Loan amounts also vary widely. Some hard money lenders can lend up to 75% of the LTV (loan to value) or LTC (loan to cost). Some can also lend up to 65% of the property’s ARV (after repair value) if that figure is higher. These scenarios only happen for particularly good deals, though. Don’t apply for a hard money loan expecting this.

Do note that some hard money lenders are willing to do what others are not. For example, some are willing to cross-collateralize a loan with other assets (another property). Most banks do not offer this flexibility.

Some hard money lenders max out at 65% LTV while others are willing to go as high as 85%. Before you go into any deal, make sure to clarify if the lender is referring to the LTV or the LTC. LTV is what the property asset is worth, and LTC refers to how much money you are putting into the property.

In any case, you will need to raise a down payment either from your savings, a personal loan from family or friends, or a partnership. As mentioned above, some lenders will let you use another property (free and clear) for cross-collateralization.

Here’s the bottom line: Hard money lenders are more flexible compared to banks. Applicants may be able to negotiate adjustments to the repayment schedule and terms.

Getting Approved: What are Hard Money Loan Requirements?

Hard money lenders usually require borrowers to fill out an application form and submit their tax returns for the last two years. Some will ask for your bank statements in the last two or three months.

You will also likely need to submit a real estate schedule and the usual identification documents, such as a copy of your driver’s license. Some lenders will check your credit score as well.

The main purpose of these documents is to show the lender that you have an exit strategy and not in financial ruins. That said, many hard money lenders routinely work with borrowers who have less than stellar credit.

Most are open to working with borrowers whose past credit issues happened during market crises and economic downturns beyond their control. They also work with borrowers who are actively resolving their credit issues.

The focus of most hard money lenders is the value of the property itself. They will request an appraisal or a Broker’s Price Opinion to accurately determine the asset’s current value as-is, and/or to compute for the ARV. The lender will also gauge your budget and scope of work to make sure that it is realistic.

If the property is beyond repair in their eyes, or if your rehab budget looks wrong, they may reject your application at this point. Finally, lenders will also evaluate the sales or rental comps.

As you can see, the amount of paperwork required for a hard money loan application isn’t nearly as much as what will be required in a traditional loan. It’s much simpler and easier to get a hard money loan than to get standard real estate financing from traditional lenders.

Banks are notorious for asking for so many documents and usually take months to review and approve an application. In contrast, hard money lenders close a loan in one to 10 business days.

It’s a good idea to start building relationships with trusted hard money lenders before making offers. Lay the groundwork before you need the money. This will increase your likelihood of successfully closing deals.

Can you get Pre-approved for Commercial Hard Money Loan?

Many hard money lenders can issue a conditional approval letter. This can be used a similar way to a pre-approval letter from a bank, which many sellers ask for.

Where can you find an Experienced & Reputable Hard Money Lender?

Finding an honest and reliable hard money lender is important if you are serious about making it big in the commercial real estate industry.

The easiest way to find a reputable hard money lender is to simply Google them to see a list in your area. The results will provide you a good number of lenders to start communicating with and evaluating.

You can also attend local real estate investor meetings. They usually attract hard money lenders who attend these events to network with potential clients. Your CRE brokers may also be able to refer you to an experienced hard money lending company. Use your network to get a solid referral.

Finally, you can get in touch with us here at Capital Investor Direct. Our commercial real estate investment advisory firm is based in Rockville, Maryland, with offices and representatives nationwide.

We specialize in customizing non-bank funding solutions for CRE investors. Expect a simple application process, fast closing, and sensible interest rates. We customize financing for CRE deals of all sizes.

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Capital Investors Direct funds different commercial properties across the country. Below are few commercial properties we lend hard money for –