A hard money loan is a nontraditional, secured loan provided by an investor to a buyer of a “hard asset,” usually real estate, whose creditworthiness is less important than the value of the asset.
Hard money loans are more common for real estate investments — purchasing a rental property or flipping a house, for instance — and can get you money quickly.
Individual investors or investment firms offer these loans. They typically have high interest rates and short repayment terms and can be risky.
Note: SoFi does not offer hard money loans at this time.
Key Points
• Hard money loans provide quick funding for real estate investments.
• Interest rates for these loans typically range from 9.00% to 15.00%.
• Down payments required for hard money loans are usually 20% to 35%.
• Repayment terms are often short, lasting six months to three years.
• Hard money loans are suitable for investors with fair credit or those needing fast financing.
Common Reasons to Get a Hard Money Loan
People typically look for hard money loans when they are interested in investing in real estate that needs repairs.
Amateur real estate investors who may not have another way of securing financing — or who may just need money fast and don’t have time for a lengthy mortgage process — rely on hard money loans for:
• Purchasing real estate to fix up and rent out
• Buying a home to upgrade and flip for a profit
Business owners sometimes take out hard money loans to purchase commercial real estate as they expand their business.
Finally, some homeowners who have poor credit but who possess equity in a home may apply for a hard money loan to avoid foreclosure.
Recommended: How to Buy a Foreclosed Home
How to Get a Hard Money Loan
Unlike lenders of personal loans or traditional mortgage loans, hard money lenders aren’t all that interested in your credit scores. Instead, they care about the value of the investment — if you default on the loan, they’ll have made money on the interest and have legal claim to the investment.
That makes getting a hard money loan easier than a traditional loan. But how do you find hard money lenders if they’re not traditional direct lenders? Finding them could be as simple as asking a real estate agent or an industry friend (like another local landlord or house flipper) for a recommendation.
Hard money lenders are also online and accessed through mortgage brokers. It’s always a good idea to find trusted reviews of a lender before signing.
Hard Money Loan Requirements
Hard money lenders are less concerned about your credit scores than traditional lenders are, though they may check your credit and verify your income. Instead, there are three basic hard money requirements:
A Valuable Asset
The investment firms and financing companies that grant hard money loans are mainly interested in the value of the investment itself. A hard money loan is based on the after-repair value of a property.
Experience
Hard money lenders may want to know that you’re capable of completing the renovations you’re envisioning for your rental property or house flip. Being able to provide a portfolio of previous work may help your cause.
A Large Down Payment
Typically, hard money lenders require a down payment of 20% to 35%.
Hard Money Loan Rates and Terms
Hard money loans come with higher interest rates and shorter terms than traditional mortgage loans. This can make them a higher risk for some borrowers.
• Rates: Interest rates can range from 9.00% to 15.00%. This is higher than the typical 30-year fixed-rate mortgage.
• Terms: In general, hard money loans come with short repayment periods. While most homebuyers choose a mortgage term of 30 years, hard money loans are often for six months to three years.
Recommended: How Inflation Affects Mortgage Interest Rates
Pros and Cons of Hard Money Loans
So what are the advantages and disadvantages of hard money loans? Let’s break it down in easy terms:
| Pros | Cons |
|---|---|
| Fast funding | High interest rates |
| Fair credit usually OK | Short repayment terms |
| Less stringent underwriting process | Large down payment |
| Easy way to start investing | Can’t work with traditional lenders |
Hard Money Loan Alternatives
Hard money loans aren’t your only option if you want to start investing in real estate, though the condition of the property will be a factor, as will the size: Any multifamily property of five or more units requires commercial financing.
It’s important to consider every avenue and understand how it will affect your finances and the likelihood of getting an offer approved.
Traditional Mortgage
Properties that need significant repairs usually do not qualify for a conventional loan, but otherwise it could be possible to use a residential conventional loan for a property with up to four units if one unit will be owner occupied for at least a year.
The same is true for qualified borrowers of an FHA loan or VA loan.
Banks, credit unions, and mortgage companies also may offer commercial real estate loans to qualified borrowers.
Home Equity Loan or Cash-Out Refi
If you have significant equity in your home, you may be able to purchase an investment property by tapping your home equity with a home equity loan, home equity line of credit (HELOC), or cash-out refinance. Interest rates are typically lower than those for a personal loan, but your home serves as the collateral on the loan.
Personal Loan
Depending on the cost of the investment property, you may be able to cover the price with an unsecured personal loan — or a personal loan and cash reserves you may have.
Borrowers, depending on their credit score, may be able to secure financing for a lower rate than they’d get with a hard money loan.
A home improvement loan could also come in handy if you qualify.
The Takeaway
Hard money loans offer fast funding and don’t require a strong credit score, making them tempting for investment properties. But these loans — which are not available through traditional lenders — typically have high interest rates and short terms.
FAQ
What is a hard money loan example?
Borrowers often seek out hard money loans for real estate investments. They may be interested in renovating a property to rent out or they may want to do a quick upgrade or more extensive rehab, then flip the home for a profit.
What are typical terms for a hard money loan?
Hard money loans typically require a down payment of 20% to 35%, come with an interest rate of 9.00% to 15.00%, and must be paid off within six months to a few years. This makes them high risk for some borrowers, but the fast funding and de-emphasis on credit history can be appealing.
Do hard money lenders run your credit?
Some hard money lenders may check your credit and verify your income, but in general, they are not as concerned with your credit scores as a traditional lender is. Instead, they want to see a large down payment, a history with rental properties, and an asset worth investing in, which serves as collateral for the loan.
Photo credit: iStock/Prostock-Studio
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.
*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.
²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945.
All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.
You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.
In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.
SOHL-Q125-028