Hard money lending works like this: a private lender funds a short-term loan secured mainly by the value of a property, closes in days rather than weeks, and charges enough in interest and fees to make the speed worth their while. Terms typically run six to twenty-four months, interest rates land between roughly 8% and 15%, and borrowers pay points upfront on top. A conventional mortgage might take 30 to 60 days to close; hard money can fund in under two weeks. That is why real estate investors reach for it on fix-and-flip acquisitions, bridge situations, and projects a bank won’t touch.
Loan Terms and Cost Structure
These loans are built for fast turnaround, not long-term holding. Most use an interest-only payment structure, meaning you pay only interest each month and then owe the full principal as a single balloon payment when the loan matures. Borrow $250,000 at 11% for twelve months and your monthly payment is roughly $2,292, with the entire $250,000 due at the end.
Lenders size the loan with one of two metrics. The loan-to-value ratio (LTV) caps the loan at a percentage of the property’s current purchase price, and most hard money lenders stay between 65% and 75% LTV. The after-repair value (ARV) estimates what the property will be worth once renovations are finished, and lenders using ARV frequently cap the loan at around 70% of that projected value. A property with a $400,000 ARV, for example, might support a loan up to $280,000 under that formula.
Points, Closing Fees, and Prepayment
Beyond interest, you pay “points” at closing. One point equals 1% of the loan amount, and most hard money loans charge two to four points. Three points on a $300,000 loan means $9,000 due at the closing table. Some lenders deduct the points from loan proceeds instead of asking you to bring cash, but the cost is real either way. You will also pay for the appraisal, title search, recording fees, and any legal review, which together can add another $2,000 to $5,000 depending on the deal.
Finishing early doesn’t necessarily save you money. Many hard money lenders include a guaranteed interest clause requiring you to pay a minimum number of months of interest regardless of when you pay off the loan. Three months of guaranteed interest is common on short-term bridge loans, so closing your flip in six weeks still costs you three full months of interest. Longer-term hard money loans, five years and up on stabilized investment properties, are more likely to use a sliding-scale prepayment penalty that decreases over time.
Extension Fees
Projects run late. Contractors miss deadlines, permits stall, buyers fall through. When your loan is about to mature and you are not ready to pay it off, most lenders will extend the term for an additional fee, typically 0.5% to 1.5% of the outstanding loan balance per extension period. On a $300,000 balance, that is $1,500 to $4,500 each time. These fees are negotiable before you sign, so raise the topic during initial discussions rather than when you are already out of time.
How the Property Secures the Loan
The property is the primary security. If you stop paying, the lender can foreclose and sell it to recover its investment, which is why the property’s value matters more than your personal financial profile. Common collateral includes single-family homes bought for renovation and resale, small apartment buildings, commercial storefronts, and industrial properties. Raw land and development sites can also serve as collateral, though lenders typically offer lower LTV ratios on undeveloped parcels because they are harder to liquidate quickly.
The lender secures its interest by recording a mortgage or deed of trust against the property, depending on the state. That lien gives the lender the legal right to force a sale if you default on the promissory note. The property needs enough equity to protect the lender even if the market dips or the renovation stalls partway through.
Cross-Collateralization
If you are borrowing against multiple properties from the same lender, the loan agreement may include a cross-collateralization clause. This pledges all the properties as collective security for the entire debt, not just the one that each loan funded. The appeal for the lender is straightforward: if one property drops in value, the equity in your other properties covers the shortfall. For you, a problem on one project can put your entire portfolio at risk. Read the security provisions carefully, because defaulting on a single loan could trigger foreclosure on properties that are otherwise performing fine.
Personal Guarantees and Recourse
Most hard money borrowers hold the property in an LLC or other entity, but the lender almost always requires a personal guarantee from the individual behind that entity. A personal guarantee makes the loan “recourse,” meaning the lender can pursue your personal assets if the property sale does not cover the full balance owed. Non-recourse hard money loans exist but are uncommon, and they typically come with higher rates, lower LTV ratios, and stricter borrower qualifications.
This distinction matters more than most borrowers realize. If a renovation goes sideways and the property sells at a loss, a personal guarantee lets the lender chase you personally for the shortfall. Whether they actually collect depends partly on state law governing deficiency judgments after foreclosure, but the contractual obligation is there regardless. Before you sign, understand what you are guaranteeing and whether the documents carve out exceptions for events outside your control.
What You’ll Need to Get Funded
Hard money underwriting is lighter than a bank mortgage, but it is not paperwork-free. The starting point is a signed purchase and sale agreement showing the acquisition price and closing timeline. Alongside that, you submit a detailed renovation budget, often called a scope of work, that breaks costs down by line item: demolition, framing, electrical, plumbing, finishes. This document shows the lender how each dollar of loan proceeds will add value.
Lenders also require a third-party property valuation, either a full appraisal or a broker price opinion, to verify the current market value and the projected ARV. You will need recent bank statements showing enough liquid reserves for the down payment (typically 10% to 25% of the purchase price), plus a cushion for carrying costs and unexpected expenses. A track record of previous successful projects helps secure better rates, because experienced flippers are simply less risky borrowers.
If you are borrowing through an LLC, expect to provide Articles of Organization, an operating agreement, and a Certificate of Good Standing from the Secretary of State. The lender needs to confirm it is contracting with a legally recognized entity that can hold title. You will also need to disclose any prior bankruptcies or foreclosures, and to document your exit strategy, whether that is a listing agreement with a broker for a quick sale or a pre-approval letter from a conventional lender for a refinance.
How Funding and Draws Work
Once your application package is complete, the underwriter reviews the deal and typically orders a physical inspection of the property. That walkthrough confirms the scope of work matches what you described and flags issues, such as structural damage, environmental hazards, or title encumbrances, that could affect the project. If the deal checks out, you receive a commitment letter spelling out the approved loan amount, interest rate, points, and any special conditions.
Closing usually happens at a title company or attorney’s office. A title search confirms there are no outstanding liens or ownership disputes. At the closing table, you sign the promissory note and the mortgage or deed of trust, and the lender wires the purchase funds to the escrow agent. For a straightforward acquisition without renovation, funding can happen in as little as seven to ten days from application.
On renovation loans, the lender does not hand over the entire construction budget at closing. Rehab funds sit in escrow and release in stages through a draw schedule tied to specific milestones: demolition complete, rough framing done, systems installed, finishes applied. Before each draw releases, a third-party inspector visits the property to verify the work was actually completed. Inspection fees typically run $150 to $300 per visit on single-family properties, and you pay each one. Budget for four to six inspections on a typical rehab. The loan stays active until you sell or refinance, at which point the full principal and any accrued interest go to the lender to release the lien.
Insurance the Lender Requires
Your lender will require specific coverage before funding, and a standard homeowner’s policy will not work. For a property undergoing renovation, you need a builder’s risk policy, which covers the structure and materials on site during construction. Coverage limits should reflect the completed value of the building (minus the land), and the policy term can be as short as one month or as long as a year, with extensions available if the project runs over. If the property will sit vacant before or after renovations, a vacant dwelling policy covers the gap, because most standard policies exclude properties left empty for more than 60 days.
You will also need general liability coverage for the project, especially if contractors are on site. The lender will want to be listed as loss payee on the property insurance and may require a certificate of insurance before releasing the first draw. Skipping this step or letting coverage lapse gives the lender the right to “force-place” insurance at your expense, which is invariably more expensive than arranging your own.
Tax Treatment of Points and Interest
Hard money loan costs are deductible, but the timing and method depend on how you are using the property.
Points paid on an investment property loan cannot be deducted in full the year you pay them. The IRS requires you to spread the deduction ratably over the life of the loan. On a twelve-month hard money loan with $9,000 in points, you would deduct $750 per month for each month the loan is outstanding during the tax year.1Internal Revenue Service. Topic No. 504, Home Mortgage Points If you pay off the loan early, you can deduct the remaining unamortized points in the year of payoff.
Interest gets different treatment depending on the nature of your activity. If you are actively flipping properties as a business, the interest is generally a deductible business expense reported alongside your other project costs. If the property is a rental, interest goes on Schedule E as a rental expense. For property held purely as a passive investment, interest deductions are classified as investment interest and are limited to your net investment income for the year, with any excess carrying forward.2Office of the Law Revision Counsel. 26 U.S. Code 163 – Interest The classification matters enough to discuss with a tax professional before your first deal, not after.
When Federal Consumer Rules Apply
The single most important regulatory line in hard money lending is whether the loan is for a business purpose or a personal one. Most hard money loans fund investment projects (flips, rentals, commercial acquisitions), which makes them business-purpose credit. Federal consumer protection laws under the Truth in Lending Act and Regulation Z explicitly exempt business, commercial, and agricultural credit from their requirements.3Consumer Financial Protection Bureau. 1026.3 Exempt Transactions That exemption means no standardized disclosure forms, no right of rescission, and no federal caps on fees or rates.
If a hard money loan is used for personal purposes, the exemption disappears. A loan to buy or renovate a home you plan to live in is consumer credit, and the full weight of Regulation Z applies. That includes the high-cost mortgage rules under the Home Ownership and Equity Protection Act (HOEPA), which kick in when the loan’s APR exceeds the average prime offer rate by more than 6.5 percentage points for a first-lien loan, or when points and fees exceed 5% of the total loan amount (for loans of $27,592 or more in 2026).4eCFR. 12 CFR 1026.32 – Requirements for High-Cost Mortgages5Federal Register. Truth in Lending (Regulation Z) Annual Threshold Adjustments (Credit Cards, HOEPA, and Qualified Mortgages) Given that hard money rates routinely land between 8% and 15% with two to four points, a consumer-purpose hard money loan will almost certainly trigger HOEPA, which imposes strict disclosure requirements and prohibits certain loan terms.
Licensing Under the SAFE Act
The federal Secure and Fair Enforcement for Mortgage Licensing Act requires anyone who takes residential mortgage loan applications or negotiates loan terms for compensation to be licensed through the Nationwide Mortgage Licensing System.6Office of the Law Revision Counsel. 12 USC 5102 – Definitions This primarily affects individuals who originate loans habitually and commercially. Occasional private lenders who fund a deal here and there without making it a regular business generally fall outside the licensing requirement, though the line between “occasional” and “habitual” is not bright.7eCFR. S.A.F.E. Mortgage Licensing Act – State Compliance and Bureau Registration System (Regulation H) Most established hard money firms are licensed. If you are borrowing from an individual private lender, it is reasonable to ask whether they hold a state mortgage lending license.
What Default Looks Like
Defaulting on a hard money loan moves faster and hits harder than defaulting on a conventional mortgage. The loan agreement likely includes a default interest rate that kicks in the moment you miss a payment or the loan matures without payoff. That rate is spelled out in the promissory note and can be several percentage points above your already-high contract rate, compounding the damage quickly.
If the default is not cured, the lender initiates foreclosure. The timeline depends on whether your state uses judicial foreclosure through the courts or non-judicial foreclosure through a trustee sale, with the process taking anywhere from a few months to over a year. Hard money lenders are generally faster to move than banks because the loan is short-term by design and the lender’s capital is tied up.
If the foreclosure sale does not cover the full balance owed, the lender may pursue a deficiency judgment against you personally for the shortfall, assuming you signed a personal guarantee and state law permits it. Not every state allows deficiency judgments, and some limit the amount recoverable, but in states that do allow them, the lender can go after your bank accounts, wages, and other assets. The combination of a personal guarantee and a declining market is the worst-case scenario in hard money lending, and it is the reason experienced investors stress-test their project numbers before borrowing.