Hard money loan requirements: Everything you need to know

Investing in real estate can be a massively profitable endeavor. Whether you're building a rental portfolio or rehabbing properties to flip, one of the major hurdles for real estate investors is finding the money to finance your properties. 

House flippers and rental property landlords often have trouble getting approved for traditional loans, so they turn to hard money loans to get the money they need. Learn more about hard money loan requirements, the pros and cons of hard money loans, and alternatives to hard money loans you should consider.

How hard money loans work

A hard money loan is a short-term loan that uses your property as collateral, and it’s built for speed and flexibility. Instead of the 15- to 30-year timelines you see with traditional mortgages, hard money loans usually last 6 months to 3 years. Because they’re designed to move quickly and don’t rely as heavily on your credit history, the interest rates are higher — often between 8% and 15% — and there may be some upfront fees at closing.

Repayment often looks a little different, too. Many lenders set them up with monthly interest-only payments and a larger balloon payment at the end, though some allow you to chip away at the balance along the way. 

Think of it as a bridge: these loans are meant to carry you from point A to point B — whether that’s finishing a renovation, flipping an investment property, or buying time until you refinance into a longer-term mortgage.

Hard money loan requirements

The requirements for hard money loans are different from what you’d expect when applying for traditional mortgages, home equity loans, or other types of consumer loans. Here are some of the requirements you need to know about before applying for a hard money loan.

Property as collateral

Hard money loans use real estate as collateral to secure funding. Much like a traditional mortgage or home equity financing, the property secures the loan in case you stop making payments. The lien remains on the property until the loan is paid off.

For property flippers looking to purchase dilapidated properties, the lender uses After Repair Value (ARV) to determine the property's value rather than the appraised value of its current state. Using ARV requires the borrower to submit a list of planned repairs and upgrades to the appraiser, allowing them to evaluate the property and forecast its value with the expected repairs.

Down payment or equity stake

When it comes to qualifying for a hard money loan, the biggest factor isn’t your credit score — it’s your skin in the game. Lenders want to see that you already have a meaningful stake in the property, either through a solid equity position if you already own it, or a significant down payment if you’re buying. 

Typically, borrowers need to put down around 25%–35% of the property’s value, or maintain a similar amount of equity. This shows the lender you’re committed and helps reduce their risk, since the property itself is the collateral for the loan.

Exit strategy

With a short loan term, you'll need to have a defined exit strategy when taking out a hard money loan. The clock starts ticking as soon as your loan closes, so having your exit strategy (and contingencies) mapped out ahead of time avoids scrambling at the last minute. Your plan often depends on your main reason for buying the property in the first place.

Here are the most commonly used exit strategies, along with the types of borrowers who would use them.

• Sale. House flippers use hard money loans to fund the purchase and rehab of properties that they plan on selling once repairs have been completed. These investors expect a quick turnaround and plan to have the property sold soon after it goes on the market. As the property sells, the hard money loan is repaid, and the investors pocket the remaining profits. If the property does not sell quickly, the borrower may need to request an extension, take out another hard money loan, or find other sources of cash to pay off the loan.
• Refinance. Rental property investors may use hard money loans to buy distressed properties and perform repairs with the intention of refinancing into permanent funding. They'll refinance the property once the rehab is complete and a tenant has occupied the property. The rental income and lease often help to get approved for the new loan.
• Bridge loans. Once the property has reached a certain level of repairs or value, borrowers may qualify for a bridge loan from a commercial bank. These loans often have lower interest rates and fees and more favorable repayment terms than hard money loans.
• Pay off with other sources. Borrowers may use other sources of cash to pay off the hard money loan. This could include the sale or refinance of another property, a large bonus from their employer, a family inheritance, or proceeds from a lawsuit. Additionally, they may take out loans with a different hard money lender with more favorable repayment terms.

Financial health

While the primary source of repayment for hard money loans is the property, the lender may still take your finances into account when analyzing your loan request. For borrowers with hard-to-prove income or less-than-perfect credit, the lower underwriting standards make hard money loans a more appealing option, even with higher interest rates and fees.

Here are a few of the requirements that you may be asked to provide along with your application:

• Bank statements
• Project budget
• Detailed rehab costs and planned repairs
• Proof of income (W2s, paystubs, tax returns)
• Credit score minimums

While hard money lenders often work with bad credit, they may still have minimum credit score requirements. The minimum credit score is usually flexible, but a FICO score of 550 or higher is preferred by some lenders.

Experience

Hard money lenders often require a certain level of experience if the intended use is to rehab distressed properties. Lenders are banking on the property achieving its ARV to support your loan request. If you don't have a track record of improving homes to sell or convert into rental properties, you may not get approved or may be charged higher interest rates and fees to compensate for the additional risk.

If you have experience, compile a list of previous deals to show the lender. The list should include the original purchase price, rehab cost, ARV, outcome of the property, and how much you borrowed. Showing the turnaround time of paying off the loan is also helpful.

Pros and cons of hard money loans

Before pursuing this strategy for your next real estate transaction, it pays to understand the pros and cons of hard money loans.

Pros of hard money loans

• Faster approval and funding. Hard money lenders often make decisions themselves rather than relying on a team of underwriters. This allows them to make faster credit decisions than a traditional lender.
• Easier to qualify for. Hard money loans are often more accessible because approval isn’t based heavily on your credit score, income, or other strict criteria that traditional lenders rely on. Instead, they focus on the value of the property and how much you want to borrow.
• No property limits. Unlike mortgage lenders that use conforming or jumbo loan limits, hard money lending does not have limits for how much you can borrow.

Cons of hard money loans

• Higher interest rates and fees. Due to the higher risk of hard money loans, lenders typically charge higher interest rates and origination fees than you'd pay for a conventional mortgage.
• Shorter loan terms. Borrowers typically must repay the loan within six to 12 months (or up to three years) compared to standard mortgage terms of 15 to 30 years. If you need more time, you'll have to request an extension or get another hard money loan and pay additional fees.
• May not build credit. Since these loans are short-term in nature and don't go through traditional lenders, they may not report loan activity to the credit bureaus. Without this reporting, your loan activity will not help build your credit history or lead to a higher credit score.

Hard money loan alternatives

While hard money loans can offer quicker access to cash than traditional mortgages, they can be expensive. If you're a real estate investor, the higher interest rates and additional fees can eat into your profits and turn a good deal into a bad one. 

Consider these alternatives to hard money loans before submitting your application.

• Private loans. A private loan is funded by an individual, and the terms are completely negotiable. The investor may request equity in the project, a percentage of the profits, or interest charges on the loan amount. They may offer longer repayment terms, depending on the terms of the deal.
• Peer-to-peer loans. Peer lending platforms allow one or more investors to fund your loan request. If your profile doesn't attract enough investors, your request may be declined.
• DSCR loan. A debt-service coverage ratio (DSCR) loan uses the property's income to qualify a borrower's loan request. Typically, your income must be at least 10% higher than the proposed mortgage payment.
• HELOCs. A home equity line of credit (HELOC) provides a flexible line of credit that you can use repeatedly to finance your real estate investments. Interest is charged only on the amount you use, and monthly payments are interest-only during the draw period. As you pay down the balance, you'll pay less interest and free up available credit that can be used again.
• Home equity loans. Home equity loans provide a lump sum of cash and stable monthly payments with a fixed interest rate.
• HEIs. A home equity investment (HEI) allows borrowers to share in the appreciation of the property rather than make monthly payments. These investments don't require proof of income or perfect credit, and they have a longer repayment period than a hard money loan, 30 years. 

Frequently asked questions

What are the criteria for a hard money loan?

Hard money loan requirements vary for each lender. Typically, you must have at least 20% to 30% equity in the property based on its after-repair value (ARV). Lenders may check your credit and require proof of income, but their underwriting tends to be much more lenient than traditional lenders.

Do you need an LLC to get a hard money loan?

No, hard money loan requirements do not include having a limited liability company (LLC). You can apply for a hard money loan as an individual, a partnership, a corporation, a trust, or any other eligible legal entity.

What are typical terms for a hard money loan?

Hard money loan requirements and terms vary by lender, the amount borrowed, and your finances. Typical hard money loan terms are interest-only payments for six to 12 months (up to three years) with a balloon payment due at the end of the term. The loan amount can be up to 70% to 80% of the property's ARV, provided there are detailed rehab plans and costs.

Final thoughts

While hard money loans charge higher interest rates and fees, they are a common financing option for real estate investors. Unlike traditional mortgages, hard money loan requirements tend to be more loose, allowing investors to secure funding when other lenders may not approve the application. Due to the high costs, it’s worth exploring alternative financing options that can increase profitability while maintaining financial flexibility first.

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