The Best Hard Money Lenders for 2023 (Interest Rates, LTV, Fees & More)

The most important criteria to consider when choosing a hard money lender is the kind of investment you want to make. Some hard money lenders specialize in fix-and-flip properties, while others are cash flow, buy-and-hold lenders. It’s also important to note that not all hard money lenders will finance multi-unit or owner-occupied properties.

Unlike most traditional mortgage lenders, hard money lenders are private individuals or companies lending their own cash. Therefore, each can charge its own interest rates (within the legal limits, of course).

Loan-to-value ratio, commonly referred to as LTV, is what lenders use to represent the difference between the amount you put down on a property and the appraised value of the property. For example, if you buy a home appraised at $100,000 and you put $10,000 down, your LTV would be 90%.

The amount a hard money lender will lend on a property often depends on the type of project, the borrower’s credit, and the asset being purchased. Still, like interest rates, each hard money lender has different loan-to-value ratios. That means you need to figure out the relationship between value of the property and the cost of the loan to determine whether or not it fits into the lender’s limits.

The loan-to-cost ratio is a measure of how much cash you contribute to the project compared to the total amount of money loaned by your lender. Lenders use LTC along with LTV to determine how much money they will lend you for a given project.

For example, let’s say you want to purchase a property appraised at $75,000 that will require $25,000 in renovations. That means the total cost of this project would be $100,000. A lender with a maximum LTC of 85% would only lend you $85,000 of the $100,000 needed for the project.

The goal of most hard money lenders is to make short-term loans that are repaid quickly so they can lend that same money out multiple times each year. To maximize profits, many charge upfront fees of between 1% and 5%. These are typically labeled as origination fees, upfront costs, or points.

While many hard money lenders prefer to work with experienced investors with a good credit history, some are open to newer investors or investors with less than perfect credit.

A hard money loan is a type of short-term property financing provided by a lender—usually a company or an investor. As opposed to a traditional mortgage loan that’s typically paid back over 15 to 30 years, a hard money loan term can be as little as one to three years.

Hard money loans can incur higher outlays than a traditional mortgage, but their costs are offset by their shorter terms. For a hard money lender, the risk is higher, but so is their potential reward.

These loans are called hard money loans because the collateral used is a hard asset: The property itself is typically the collateral for the loan. Unlike traditional mortgage financing, a hard money lender makes lending decisions based primarily on the value of the property being purchased and less on the creditworthiness of the borrower—although that’s still a factor.

Hard money lenders offer short-term loans on real estate, often covering both the purchase and development or rehab costs. These loans are commonly used with real estate investment deals like fix and flips or buy-rehab-rent-refinance projects (or BRRRs). Hard money loans are also sometimes used to avoid a looming foreclosure.

A hard money lender can offer ideal loan terms for specific situations, including no income verification and interest-only loans. Hard money lenders aren’t subject to the same regulatory and compliance rules as conforming loan lenders, such as retail banks.

Hard money loans are different from conventional mortgages because they don’t require all the documentation or strict guidelines to qualify. Due to the flexible nature of hard money loans, there aren’t set guidelines to qualify. However, most hard money lenders will consider the following criteria when approving your loan:

Down payment

The down payment you are willing to offer up is the most significant qualification factor for a hard money lender, but not the only one. While there are low-down payment options, most require 20% to 30% down. The higher the down payment, the lower the LTV. This reduces the lender’s risk if they have to take the property back in the event that you fail to repay the loan.

Collateral

Most hard money lenders are going to place a high priority on the collateral. This often includes the property itself and can encompass other properties and investment accounts they can cross-collateralize. Lenders need to be sure that the collateral they are securing is more than enough to cover the loan and recovery costs.

Credit score

While your credit score is vital to some hard money lenders, it is not as important as the other factors in this list. The minimum credit score requirement for hard money loans can depend significantly on the collateral and your down payment.

Some hard money lenders will lend on credit scores as low as 600. However, the higher the LTV, the greater the risk to the lender, which means they will require a better credit score or more collateralized assets to extend the loan to you.

On the other hand, if you have a large enough down payment and substantial collateral, the hard money lender may not even check your credit.

Income verification

In most cases, your ability to repay the loan is dependent on your personal income or the income from your business. Hard money lenders will want to know that you have enough income to cover the payments on the loan.

Unlike a traditional mortgage, where the lender will verify your employment and debt-to-income ratios, many hard money lenders may only need to verify through your bank statements that you have the income to cover the monthly payments.

Income verification loans deservedly got a bad name after the Great Recession of 2008. However, they are still an important tool used by many real estate investors and self-employed borrowers.

The property’s rental income

If the real estate you’re purchasing is a cash-flow property, some hard money lenders can use the rental income to qualify you for the mortgage in lieu of employment-based income.

Related article: How to Evaluate Fix & Flip Houses Like a Pro (+ Risk Worksheet)

In addition to your down payment, be prepared to pay 1% to 5% in upfront fees. These are typically called origination fees, upfront costs, or points. While some lenders charge only one of these fees, others may charge all three, so be sure to ask.

Additional fees from the hard money lender may cover costs such as documentation, underwriting, or closing fees.

Be sure to inquire if your loan has any extension fees you’ll be required to pay should your fix and flip take longer than expected to renovate. Also ask about any prepayment penalty in the event you decide to pay off the loan early.

Other costs you must account for are property insurance, transfer taxes, and title and escrow fees.

Most hard money loans require interest payments during the term of the loan. However, well-qualified borrowers may not be required to make them during the loan term.

Like traditional mortgage providers, many hard money lenders still require a full credit report, asset verification, and down payment from the borrower. However, they are less stringent on qualifications like credit score, debt-to-income ratio, and asset verification.

Due to the risky nature of hard money loans, the interest rates are higher than traditional mortgages. The actual interest rate may also change based on the property type, borrower’s credit score, and the use of the loan. For example, a fix-and-flip loan will almost always have a higher interest rate than a rental property.

Hard money loans are typically used for fix and flips, hard to finance income properties (like multifamily properties larger than five units), and mixed-use properties. Some borrowers use hard money lenders to provide a bridge loan so they can purchase their replacement property before selling what they already own.

Investors also use this technique to do a reverse 1031 exchange. The investor might use a hard money loan to purchase a sizable multi-unit investment property. Then after they purchase and close, they sell their rental houses to satisfy the trade.

Related article: How to Explain 1031 Exchange Rules to Your Clients (in Plain English)

Investors also use hard money loans to fund new construction. RCN Capital offers up to 90% LTC new construction financing, for example.

Yes, most hard money lenders will lend on both the purchase price and renovation costs up to 75% of the property’s after repair value (ARV).

For example, say you find a motivated owner willing to sell you their dilapidated property in a nice neighborhood for $200,000. If you were to remodel the kitchen, paint the exterior, and do other minor repairs, the property would be reasonably worth $350,000. The lender will lend you $200,000 for the purchase price and up to $62,500 for the repairs, as the resulting loan would be 75% of the ARV.

While some hard money lenders claim they can close in as fast as five days, other factors may take longer than a business week. To finance a property, you will need to have a title insurance policy, and it may take a few days to ensure that all the liens are accounted for and paid to guarantee a clear title. Therefore, count on it taking a minimum of two weeks to complete the transaction.

While not all hard money lenders will require a traditional appraisal, they will have the property evaluated by a professional to ensure that the collateral is sufficient to secure the loan.

Not all hard money lenders require a hard credit inquiry. Some can just use a soft inquiry that won’t affect your credit score.

If credit is a concern, most hard money lenders will approve loans for borrowers with bad credit if they have a cosigner, can put up a larger down payment, or offer additional collateral for the loan.