What Is a “Hard Money” Loan, and How Does it Work?

If you want to flip a house or buy an investment property and need fast cash, a “hard money” loan might be on your radar. Contrary to its name, a hard money loan usually isn't difficult to get. In fact, it's typically quick and easy, but this short-term financing option could come with some drawbacks you should consider, such as a high interest rate and a short repayment term.

Let’s dig deeper into what a hard money loan is, how to get one and the pros and cons to help you make the best decision for your budget.

What is a hard money loan?

A hard money loan is a short-term, secured loan that uses real estate or an investment property as collateral, something valuable the borrower pledges to back the loan. A hard money loan is usually considered a last-resort loan intended for people who don’t qualify for traditional financing.

If you fail to make payments on your hard money loan, the lender could put your property into foreclosure to recoup their losses. In most cases, hard money loans are available through individual investors and financing companies rather than traditional lenders like banks and credit unions.¹

What are hard money loans used for?

The most common uses for hard money loans include:

Flipping residential homes

Hard money loans can be an attractive option for house flippers who need cash to renovate a home and then sell it for a profit. Hard money loans essentially serve as home improvement loans that allow flippers to quickly fix up their properties.²

Buying investment properties

People who want to invest in rentals but aren’t eligible for traditional mortgage loans may turn to hard money loans. A hard money loan may help borrowers fund their investments without meeting rigorous requirements, like having strong credi t. Hard money loan providers usually focus on other factors when approving loans, such as property values, the amount of equity in the property securing the loan, financial capability and investment experience.³

Purchasing commercial properties

Business owners and entrepreneurs might use hard money loans to buy commercial properties, like office buildings or warehouses. Hard money loans may be particularly appealing if they can’t lock in traditional financing or find a commercial loan that’s large enough for their needs.⁴

Homeowners facing foreclosure

Homeowners who learn that their house is at risk for foreclosure may take action and quickly look for a hard money loan. With a hard money loan, they could receive the cash they need to keep their property in the short term. Because of the high interest and short repayment period, a hard money loan likely wouldn’t be a good long-term solution for avoiding foreclosure.⁵

How does a hard money loan work?

A hard money loan is often secured by the property you want to buy. If you default on your loan, the lender may repossess your property to recoup their losses. While each lender has their own terms, most hard money loans come with a short repayment period that may be anywhere from one to three years.⁶ Traditional mortgages typically have much longer repayment terms of 15, 20 and 30 years.⁷

The interest rate for a hard money loan tends to be higher than a traditional mortgage and often falls in the 8% to 15% range, as of 2025.⁸ In addition, you may have to put down a much larger down payment with a hard money loan, usually around 20% to 30% of the property’s current value, than you would with a traditional mortgage.⁹

Note that lenders who offer hard money loans usually aren’t regulated in the same way as mortgage lenders. Regulations and licensing requirements can vary state by state.¹⁰ Because business loans like hard money loans may have fewer consumer protections than loans intended for personal use, it’s a good idea to weigh the risks and make sure the terms work for you.¹¹

How to get a hard money loan

If you’d like to take out a hard money loan, consider these steps:

1. Find a lender

The first step is to do some research and find lenders who offer hard money loans. If you’re unsure of where to start, reach out to real estate investor associations like the National Real Estate Investors Association or other reputable real estate groups for guidance. You can also ask trustworthy real estate agents for their recommendations. Just as when shopping for a personal loan, it’s a good idea to check out multiple lenders and read customer reviews so you can find a reputable option for your needs.¹²

2. Decide on a repayment plan

Once you find a lender, work with them to come up with a repayment plan. Remember that hard money loans usually have shorter repayment terms than traditional mortgages. You’ll also likely have a higher interest rate.

Before you move forward with this type of financing, make sure you are comfortable with the repayment plan and confident that you’ll be able to pay back your loan while meeting your other financial obligations.¹³

3. Apply for the loan

Generally, the main factor lenders look at in your hard money loan application is the value of the property you plan to use as collateral. Y ou will have to show the value of the property by getting a property appraisal . Lenders may also look at your credit score, but that typically isn’t as important as it would be for a traditional mortgage. Some lenders may look into your prior real estate investment experience and want to know your plans for improving the property and how you intend to make money from it.

Most lenders may ask for some or all of the following:¹⁴

• Proof of identity: A driver’s license, ID or passport to confirm who you are
• Proof of income: Pay stubs, tax forms or bank statements to confirm income and employment
• Proof of funds: Bank statements to confirm you have the funding for a down payment
• Property documents: Purchase contract, insurance, construction bids or other paperwork to confirm you plan to own and take care of the property
• Business documents: For professional flippers and investors to prove they are operating as a business

4. Get approved

Applying for a hard money loan does not guarantee you’ll be approved. After you submit your application for the loan, the lender may ask you for additional documentation, such as mortgage statements or appraisal reports to further establish the value of the property. Once approved, you may receive funds in as few as 10 days, compared to traditional mortgages that can take weeks or months to get funded.¹⁵

Pros and cons of hard money loans

Just like all loans, hard money loans have benefits and drawbacks that are important to understand, such as:¹⁶

Pros

• Fast approval and funding times: A hard money loan may be a compelling option because the approval process is typically fast compared to a mortgage. Depending on the lender and when you apply, you could get approved and receive your funds in just a few weeks.¹⁷
• Stronger focus on collateral instead of creditworthiness: Traditional mortgage lenders focus on a borrower’s credit and debt-to-income ratio, which might be an issue if your finances aren’t in the best shape. While creditworthiness is still a factor, hard money lenders tend to place more emphasis on the property you plan to use as collateral.
• Useful for short-term projects: With a short repayment period, a hard money loan is best suited for investments that pay off quickly, such as selling a flipped house.
• May prevent foreclosure for distressed property owners: If you’re facing foreclosure, a hard money loan may get you the funds you need more quickly than a loan from a traditional lender.

Cons

• High interest rate: A hard money loan will likely come with a much higher interest rate than a traditional mortgage. With a higher interest rate, you’ll increase your overall cost of borrowing.
• Short repayment terms: You’ll have to repay a hard money loan relatively quickly since it’s a short-term loan. You could take 15 or 30 years with a traditional mortgage, but hard money loans have terms as short as six months.
• Risk of foreclosure: While a hard money loan can help you avoid foreclosure if you need money fast, defaulting could once again put your property at risk. Since a hard money loan is secured and uses the property as collateral, you could lose the property if you can’t make your loan payments.

Other options to consider

You might investigate some of these options if you’d like to fund a flip or purchase an investment or commercial property:

Home equity line of credit (HELOC)

If you’re a homeowner, you may qualify for a home equity line of credit (HELOC), which will be based on the amount of equity you have in your home. A HELOC uses the equity in your home as collateral. Equity is the difference between what you owe on your mortgage and the current market value of your home, as determined by a licensed appraiser. While both a HELOC and a hard money loan use your property as collateral, you’ll likely get a much lower interest rate with a HELOC because repayment terms are longer. With a HELOC, you’ll get a revolving line of credit that allows you to withdraw funds as needed, up to a set credit limit.¹⁸

Cash-out refinancing

A cash-out refinance is when you take out a new loan that’s larger than your current mortgage and keep the difference. The amount of equity you have in your home will determine how much cash you receive. Taking out a cash-out refinance could save you money, as interest rates are usually more competitive than a hard money loan.¹⁹

Peer-to-peer lending (P2P)

Traditional lending options like mortgages are offered by banks, credit unions, and online lenders. Peer-to-peer (P2P) lending, however, is when you borrow money from an individual, investor or company, usually through an online lending platform. Just like hard money loans, with a P2P loan, you could get approved and funded fairly quickly, sometimes within a few business days. If you have strong credit, you may be able to lock in a better interest rate with a P2P loan than a hard money loan.²⁰ Since most P2P loans are for $50,000 or less, you may not be able to borrow enough to fund an entire house flip or home purchase.²¹

Private loans

If you’re in need of fast cash, it might make sense to ask your friends and family for help. Before you go this route, make sure you get an agreement about how much and when you’ll repay your friend or family member in writing, so everyone is on the same page. Remember that failure to repay your loan could negatively affect your relationship with a loved one, so keep the lines of communication open.²²

Hard truths about hard money

A hard money loan may seem like a good option if you’re unable to qualify for traditional financing and need fast funding for an investment property, rental or commercial building. However, a hard money loan could be riskier and more expensive in the long run than other funding methods. Be sure to weigh the costs and benefits and consider alternative options to make the best decision for your financial situation.

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Sources: 1, 2, 3, 4, 6, 7, 8, 9, 13, 17,22 https://www.experian.com/blogs/ask-experian/how-do-hard-money-loans-work/
5,11,12,15 https://www.investopedia.com/terms/h/hard_money_loan.asp
10 https://www.wolterskluwer.com/en/expert-insights/do-hard-money-lenders-need-to-be-licensed
14 https://www.constlending.com/blog/hard-money-loan-requirements
16 https://www.experian.com/blogs/ask-experian/pros-and-cons-hard-money-loans/
18 https://www.nerdwallet.com/article/mortgages/heloc-home-equity-line-of-credit
19 https://www.nerdwallet.com/article/mortgages/refinance-cash-out
20 https://www.investopedia.com/terms/p/peer-to-peer-lending.asp
21 https://www.investopedia.com/articles/investing/092315/7-best-peertopeer-lending-websites.asp