An investor finds a distressed property priced below market, but the deal closes in two weeks or it disappears. A conventional mortgage takes 30 to 45 days minimum. This is the scenario hard money lending was built for. Understanding exactly what hard money lenders evaluate, and in what order, is what separates investors who close quickly from those who lose deals to paperwork.
What Hard Money Loans Are and How They Work
Hard money loans are short-term, asset-secured loans originated by private lenders or specialty finance companies rather than banks. The defining characteristic: loan approval is based primarily on the collateral property's value, not the borrower's credit score or debt-to-income ratio.
Terms are short, typically 6 to 24 months, with some bridge-oriented products extending to 36 months. Interest rates range from roughly 8% to 15% annually depending on the lender, deal risk, property type, and borrower experience. Origination points generally run 1 to 4 points (1 point equals 1% of the loan amount).
The loan proceeds are secured against the property. If the borrower defaults, the lender forecloses. That straightforward collateral structure is what allows lenders to approve deals in days rather than weeks.
The Role of After Repair Value (ARV)
ARV, or After Repair Value, is the estimated market value of the property after planned renovations are complete. Hard money lenders use ARV as the denominator when calculating how much they will lend.
A lender offering 70% loan-to-ARV (LTV based on after-repair value) on a property with a projected ARV of $300,000 will lend up to $210,000. That figure must cover both the purchase price and, in many cases, a portion of the renovation budget. Lenders typically advance renovation funds in draws tied to completed milestones rather than as a lump sum at closing.
ARV estimates are based on comparable recent sales in the immediate area, the scope of the planned renovation, and the property's location. An overstated ARV is the fastest way to lose lender confidence.
