Building a business requires a consistent stream of funds. Sometimes, a special project requires more than the normal amount on hand. This requires the business to raise funds via crowdfunding, loan, initial public offering, initial coin offering or pursuing funding by an angel investor or venture capitalist. Your choice depends on your business and the reason for the funding need. One sometimes overlooked option, the hard money loan, can provide a quick infusion of capital for mid-sized to large real estate projects.

Hard Money Loans Defined

Hard money loans provide a short-term loan or mortgage to fund purchase, renovation or restoration of real estate, especially investment properties. Hard money loans, also called bridge loans, help the real estate purchaser “bridge the gap” from purchase to resale or refinance of the real estate.

You can obtain a bridge or hard money loan much more quickly than a traditional mortgage. This loan type has less stringent requirements than a traditional mortgage, too. It does come with a slightly higher interest rate though. Typical rates range from seven to 12 percent. The lender disbursement fee ranges from one to 10 percent. Hard money loans require the borrower to pay upfront fees from the initial loan amount.

With loan terms of one to three years though and interest-only payments, this still makes it a relatively cheap loan. To summarize, the bridge or hard money loan offers:

  • a pre-qualification application with quick response,
  • a quick funding turnaround,
  • less stringent borrower qualifications,
  • interest-only payments,
  • a short loan term of one to three years.

When to Use a Hard Money Loan

Hard money loans provide the go to funding mechanism for a number of real estate options. Real estate investors use it to obtain funding for:

  • house flipping renovations,
  • rental property renovations,
  • traditional real estate purchase and resale/transfer,
  • all-cash purchase at real estate auction.

An investor can use a hard money loan for purchase of a single family home or a multi-unit dwelling.

For short-term projects, it’s the common funding mechanism used for fix and flip projects requiring one year or less. Investors use these for long-term projects, too, such as portfolio investors purchasing and renovating a rental property before converting to a conventional mortgage. Once an investor obtains four to 10 traditional mortgages, banks balk at issuing another. This requires the buy-and-hold investor to find an alternative like a hard money loan.

Common Loan Requirements

Applying for a conventional mortgage means meeting a bank’s strict requirements for a federally regulated mortgage. A traditional mortgage qualification requires:

  • a minimum credit score of 640,
  • employment verification,
  • two recent pay stubs,
  • a less than 50 percent debt to income ratio.

The home the mortgage applies to must be in good condition.

Applying for a hard money loan also means meeting the lender’s requirements, but this loan type features less stringent requirements. A hard money loan qualification requires:

  • a minimum credit score of 550,
  • two or three months of bank statements,
  • the property location(s),
  • the purchase price,
  • a detailed resume of real estate experience and prior projects,
  • the purchase contract,
  • contractor bids,
  • the renovation scope of work.

Hard money loans may be obtained for homes in poor condition.
The lender conducts its own property appraisal to assess the value. This becomes the basis of the loan amount. Typically, a lender uses the loan-to-value (LTV) ratio for properties in good condition. Lenders apply the after-rehab-value (ARV) ratio for properties in poor condition.

Why Choose a Hard Money Loan

Hard money loans, also known as bridge loans, offer easier qualification and simple terms for real estate investors. Lenders will extend a bridge loan to new real estate investors, as well as, the experienced ones. This can help those new to house flipping get their foot in the door. Lenders will require more information from new investors though.

Although it features higher interest rates, the bridge loan’s short terms and interest-only payments provide a quick, cheap source of funding. With terms up to three years, even if a project lags behind a bit, the building will usually sell before the loan comes due.

Many lenders use a standardized online application. It provides a quick pre-authorization turnaround that lets a borrower know if they’ll obtain funding.

Real estate investors can turn to the bridge loan or hard money loan to quickly fund a purchase or renovation. Its flexible terms let the investor move on a property immediately.