Hard Money Loans: How Asset-Based Investor Lending Actually Works
Hard money is not a worse mortgage. It is a different instrument for a different job.
A thirty-year loan buys and holds a stabilized property. Hard money buys speed and buys condition — it funds properties a conventional lender will not touch, on timelines a conventional lender cannot meet.
It is expensive, and the expense is rational. Here is the structure.
Programs: Fix and flip and hard money · Run a deal
What makes it "hard money"
The loan is secured by the asset, and the asset is what gets underwritten. Your income matters far less than the property and the plan.
Three consequences:
Condition is not a disqualifier. A house with no working kitchen, a failed roof and active code violations is uninvestable to a conventional lender and perfectly normal to a hard money lender. That is the entire point.
Speed is possible. No income documentation cycle means 7-21 days is achievable, against 30-45 conventional. What makes speed possible.
The exit is underwritten, not just the entry. A hard money lender is lending against a plan with an end date. "How do you repay this in twelve months?" is the question that decides your file.
What it costs
Honest ranges. These move with the market and vary by lender, experience and deal.
| Component | Typical |
|---|---|
| Interest rate | Roughly 9.5-12.5%, interest-only |
| Origination points | 1.5-3 points |
| Term | 6-18 months |
| Exit fee | 0-1 point, program dependent |
| Extension fee | 0.5-1 point per extension |
| Draw fee | $150-$500 per inspection |
Interest-only is standard. You pay interest on the drawn balance, not a principal-and-interest payment. That keeps the monthly carry lower than the rate implies.
Points are the real cost. Two points on a $300,000 loan is $6,000 paid at closing. On a six-month flip, points often cost more than the interest does — so comparing lenders on rate alone is a mistake.
The honest way to compare: calculate total cost of capital in dollars over your expected term. A lender at 10.5% and 3 points can be more expensive than one at 11.5% and 1.5 points on a short project.
How the money is actually delivered
This is the mechanic new investors most often misunderstand.
Purchase funds go out at closing. Standard.
Rehab funds do not. They sit as a commitment and get released in draws, reimbursed after the work is done and verified.
The cycle:
- You complete a phase of work
- You request a draw
- The lender sends an inspector, or accepts photo/video documentation
- The lender releases funds for the verified work
- Repeat
You are fronting the work. Between paying a contractor and receiving reimbursement there is typically a 3-10 day gap. Across five draws on a large rehab, that float requires real working capital that has nothing to do with your down payment.
Investors who budget only the down payment and closing costs run out of cash at draw two. This is the most common cause of a stalled rehab.
Some lenders will fund a first draw at closing for demolition and materials. Ask — it is not universal and it changes your cash needs materially.
What you put in
Leverage is expressed against three different bases, and the lender applies all of them, then takes the lowest result.
- LTC — loan to cost, typically 80-90% of purchase, often 100% of rehab
- ARV — after repair value, typically capped at 65-75%
- LTV — loan to current as-is value, used on some programs
The binding constraint moves from deal to deal. How the three interact.
Practically, expect to bring 10-20% of purchase plus closing costs plus the draw float plus a contingency.
The exit is the underwriting
Conventional lending asks whether you can make payments. Hard money asks how you get out.
Three exits:
Sale. The flip. The lender wants to believe the ARV and the timeline.
Refinance into long-term debt. The BRRRR path — hard money to DSCR. This requires the takeout lender's seasoning and lease requirements to line up with your hard money maturity, and they frequently do not. The handoff mechanics.
Payoff from another source. A sale elsewhere, a capital event, a partner contribution.
A loan without a credible exit is not financed, it is gambled. The most expensive mistake in this product is reaching maturity without a completed project or a takeout — at which point you are negotiating extensions from a weak position, or selling into whatever the market is that month.
What underwriting looks at
Roughly in order:
- The property and the ARV. Comparable sales support the value, or they do not.
- The scope and budget. A line-item scope of work. A number scribbled on a napkin gets repriced.
- Your experience. Prior projects change leverage materially. The first-timer picture.
- Liquidity. Down payment, closing costs, draw float, contingency, and carry through the term.
- Credit. Lighter than conventional, but it is checked — commonly a 620-660 floor, mainly as a fraud and pattern screen.
- The exit. Documented and plausible.
When hard money is the right tool
Use it when:
- The property will not pass a conventional appraisal — condition, systems, code
- Speed wins the deal — auction, estate sale, a seller who needs certainty
- You are adding value and the hold is short
- You are past conventional property limits and the deal is time-sensitive
Do not use it when:
- You are buying a stabilized rental to hold. That is a DSCR loan, at a fraction of the cost.
- The margin is thin. Hard money consumes margin. A deal with $30,000 of spread does not survive $22,000 of financing cost.
- You have no contingency. Rehabs run over. Budget 10-20% beyond your scope.
- The exit is hypothetical.
A worked cost picture
$250,000 purchase, $70,000 rehab, $390,000 ARV, seven-month project.
| Line | Amount |
|---|---|
| Purchase | $250,000 |
| Loan at 85% LTC purchase | $212,500 |
| Down payment | $37,500 |
| Rehab financed (drawn over time) | $70,000 |
| Origination, 2 points on $282,500 | $5,650 |
| Interest, ~7 months on avg balance | $16,400 |
| Closing costs, title, insurance | $6,200 |
| Total financing cost | $28,250 |
| Sale at ARV | $390,000 |
| Selling costs at 7% | $27,300 |
| Net profit | ~$44,450 |
The financing cost $28,250 to make $44,450. That ratio is why margin discipline matters more here than anywhere else in real estate lending — and why a deal that looks thin on paper is usually worse than it looks.
Illustrative. Terms, costs and values vary by lender, property and market.
Frequently asked questions
What is a hard money loan? Short-term, asset-based financing secured by real estate, underwritten primarily on the property and the exit rather than on your income.
What does hard money cost? Commonly 9.5-12.5% interest-only plus 1.5-3 origination points, on 6-18 month terms. Compare total dollar cost over your actual timeline, not rate alone.
How fast can it close? 7-21 days is realistic when your documentation is ready. What drives the timeline.
Do I need good credit? Lighter than conventional, but it is checked — commonly a 620-660 floor.
Is rehab money paid up front? No. It is reimbursed in draws after inspection. Budget working capital to float the work.
Can I use hard money for a rental I plan to keep? As a bridge, yes — buy and rehab with hard money, then refinance into a DSCR loan. Not as permanent financing.
What happens if I cannot repay at maturity? Extensions are often available for a fee, but not guaranteed. Without an extension or a takeout the lender can foreclose. Plan the exit before you close.
Next steps
Model the total dollar cost of capital over your realistic timeline, then confirm the exit. Those two answers determine whether hard money is a tool or a trap on a given deal.
Have a deal you want looked at?
Send the property and the numbers — we shop it across lender programs and tell you honestly whether it works.
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Educational content, not a commitment to lend or an offer of credit. DSCR and fix-and-flip loans are business-purpose loans secured by non-owner-occupied property. Program parameters vary by lender and change over time. Figures are illustrative.