A fix-and-flip investor finds a distressed property at auction, needs to close in 10 days, and has two other rehab projects already on a conventional credit line. A traditional mortgage is not an option. This is the scenario hard money loans were built for, and also the scenario where misunderstanding the costs can turn a profitable deal into a loss.
What Hard Money Loans Are (and Are Not)
A hard money loan is a short-term, asset-based loan secured by real property. The lender's underwriting centers on the collateral, typically the property's current value or its after-repair value (ARV, the estimated market value after renovations are complete), rather than on the borrower's debt-to-income ratio or credit score.
Hard money lenders are almost always private companies or individual investors, not banks or credit unions. They operate outside the conventional mortgage system, which is precisely what allows them to move quickly and fund deals that fall outside Fannie Mae or Freddie Mac guidelines.
What hard money loans are not: a cheap source of capital or a long-term financing solution. Rates typically range from 9% to 15%, origination fees run 1 to 4 points (1 point equals 1% of the loan amount), and terms usually span 6 to 24 months. Those numbers reflect the lender's risk and the speed of execution, both of which are real.
How Hard Money Loans Differ from Conventional Financing
The differences are structural, not just cosmetic.
Underwriting focus: Conventional lenders verify income, tax returns, employment history, and credit scores. Hard money lenders primarily assess the property's value and the borrower's exit strategy. A borrower with a 620 credit score and a solid deal can often get funded; the same borrower would struggle with a conventional investment property mortgage.
Speed: Conventional investment property mortgages typically take 30 to 60 days to close. Hard money lenders routinely close in 5 to 14 business days, and some can move faster on repeat borrower relationships.
