Real estate investors often use hard money loans instead of their own money, money from private investors, or a loan from traditional lenders or local banks. Moreover, hard money loans are easier to qualify for, often have a low minimum credit score requirement, do not require you to prove property cash flow, and require far less documentation. You can often be approved in just a few days, as opposed to the lengthy process of a traditional loan.

Yet, there are other options, including Visio Lending. We provide financing with reasonable loan terms for a variety of investment needs, including options that don't require a personal finance investigation.




What is a hard money loan?

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A hard money loan is a type of short-term loan secured by real property.

Their terms usually last between six and 24 months, and they have higher fees and interest rates. Hard money loans are mainly used to finance flipping homes, buying investment properties, and commercial real estate purchases. They are sometimes also used by borrowers with substantial equity and poor credit scores.

Hard money loans often include both purchase financing to fund buying a property and construction financing to make improvements to the property.



What Hard Money Lenders Focus On

Hard money lenders are usually companies, private investors, or financing groups, not banks. Most of these lenders focus first and foremost on the value of the real estate put up as collateral for the loan.

Hard money lenders also care deeply about the real estate investor's experience and business plan for the property. For the lender, it pays off to receive the money back in a relatively short time and at a higher interest rate.

Some, maybe even most, look at the investor's credit score and depth of credit. Most hard money lenders tend to be more lenient on credit than traditional mortgage lenders. For example, they may have lower minimum credit score requirements.


Hard Money Loans vs. Construction Loans vs. Renovation Loans

The term construction loan generally refers to a loan for the ground-up construction of a new home or commercial building. It also includes purchase financing for the underlying real estate.

On the other hand, a renovation loan is a type of loan someone would need to remodel an existing building.

The main difference between a renovation loan and a hard money loan is that the renovation loan is only structured to finance renovation costs, not purchase a property.

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Hard Money Loans vs. Bridge Loans

Short-term bridge loans are a subset of hard money loans. The key difference is that a bridge loan does not include the renovation or construction component. An example of this would be when real estate investors find a great deal on a piece of real estate and need a short-term loan to hold it briefly before selling it to another investor to fix and flip. 


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Hard Money Loans vs. Traditional Loans

Conventional mortgage financing, including loans from most local banks, has a stringent approval process that focuses heavily on a borrower's credit score, debt-to-income ratio, pay stubs, and cash reserves.

Even though hard money loans have more burdensome loan terms, such as higher interest rates and sometimes prepayment penalties, they are much easier to qualify for than conventional mortgage loans and typically don't require tax returns or income documentation.

If you want to purchase a rental property but have poor credit or credit issues you may need to consider hard money loans or their alternatives instead of conventional loans.

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How Hard Money Loans Work

Hard money loans are usually broken into two parts: the purchase of the real estate and the rehab.

The real estate purchase is relatively straightforward. The lender will typically size their loan amount to both the after-repair value, or Loan-to-Value (LTV), and the total cost of the project or Loan-to-Cost (LTC).

Once your loan is approved, you close on the purchase, usually with you funding the down payment and the lender funding the remainder of the purchase price and closing costs. There may be additional upfront fees, though some lenders charge no origination or processing fees.

The rehab process is where hard money loans get interesting. Let's say you now own the property and want to begin to improve it. You need funds to buy materials and pay contractors. Most hard money loans require you to front this initial investment in materials and labor.

After you've completed a phase of the work consistent with your renovation project, you request something called a construction draw from the lender. This means you can submit a request for reimbursement only after you've made renovations. So, in order to successfully use hard money financing, house flippers need to have enough upfront cash reserves for initial rehab costs, including labor and materials.  

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Applying for a Hard Money Loan

The application process for the purchase is similar to other types of finance. You complete an application, provide documentation, and usually order an appraisal. You must also provide a business plan for the property and a detailed.

Why are hard money rates and fees higher?

Hard money loan rates and fees are higher for a few key reasons. First, the terms are short, so the lender must charge higher fees and interest rates to cover the costs of an investment property loan while still earning a reasonable profit.

Second, because hard money loans often include construction financing, they tend to be higher risk than permanent financing on existing properties.

Finally, many hard money lenders have more flexible or lenient credit or underwriting requirements. For example, many local hard money lenders do not require full-blown appraisals if they lend in the same city as theirs. 


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Hard Money Loan Pros

  • Qualify based on property value: Unlike a traditional loan, hard money loans rely more on property value rather than personal credit history.

  • Fast closings: Often, hard money loans close in as little as a few days.

  • Quick approvals: Since personal income is not a determining factor, hard money loans offer much faster approvals.

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 Hard Money Loan Cons

  • Short term financing: Real estate investors have less time to pay back their loans.

  • High rates and fees: Interest rates tend to be higher on hard money loans. They also often have higher fees.

  • Low LTVs: You're going to need a higher down payment.



Hard Money Loan Alternatives

The best alternative to a hard money lender primarily depends on the purpose of your loan. 

  • If your goal is to purchase multiple investment properties, you can consider working with banks or traditional lenders. You can also work with a DSCR lender like Visio to obtain a loan for an investment.
  • If you want a single multi-unit property, you may get a Federal Housing Administration (FHA) loan.
  • If your goal is to flip properties, a hard money lender could be the right choice for you, as long as you have a solid exit strategy (see the next section for more details). 

Another loan option for financing a construction project is to use a cash-out refinance to pull cash out of another property. Frequently, investors will work with Visio Lending to obtain a cash-out refinance loan on a rental property and use the cash to finance another investment. A second mortgage on an existing property may be a reasonable option as well. 

Our team can help guide you through the alternatives to hard money lending based on your specific needs, such as a vacation rental loan.


What are the risks of a hard money loan?

Hard money loans are riskier than traditional loans for both investors and lenders due to their short repayment periods and high rates. They are less regulated than traditional mortgages, meaning there are fewer options for borrowers struggling to repay their debts. As they are secured loans, if the borrower defaults, they may be at risk of losing their investment.  



Exit Strategies for Hard Money Loans

Hard money loans are short-term loans, with two years typically being the longest term. Since the loan is due in full within two years, it is key to have an exit strategy to avoid paying a large lump sum. Below are some ways to repay your hard money loan.

Sell the Investment Property

This is the most common exit strategy for a hard money loan. A borrower will work with a hard money lender to finance a flip, flip the property, pay back their loan, and pocket the extra cash. However, flipping properties isn't nearly as simple as it may seem. To ensure a worthwhile ROI, investors have to rely on careful planning and work with a licensed contractor, as well as an experienced real estate agent.

Refinance Your Hard Money Loan into Permanent Financing

In this strategy, rather than selling investment properties at the end of a flip, investors will keep them for long-term rentals.

Some investors are able to use the improvements put into the house to obtain a higher loan amount and actually pull cash out of the property. Others will simply obtain more favorable loan options, including loan rates and terms.

A few things to keep in mind for this strategy include:

  • Down Payment and Closing Costs – There are expenses in obtaining a new loan, and you will usually need to pay at least 20% upfront.

  • Prepayment Penalties – Some lenders have a prepayment penalty if you pay back the loan early. If your goal is to sell the property in the near future, pay close attention to the loan terms.


Hard Money Loan Requirements vs. Visio Lending Requirements

Visio Lending's primary focus is providing long-term financing to enable landlords to grow their rental portfolios. On the other hand, hard money lenders typically fund short-term projects such as construction, fix and flip, or rehabs.

Here's a closer look at some other distinctions between Visio Lending and hard money loans:

  • Credit Score – Visio Lending requires a minimum of 680, while not all hard money lenders require a credit report.

  • Appraisals  – Visio Lending requires a third-party appraisal, but now all hard money lenders do. Some use a Broker Price Opinion (BPO) or other methods to determine lending value.

  • Property Condition  – Visio Lending requires properties to be in C4 condition or greater, meaning we only fund rent-ready properties with no deferred maintenance. Hard money lenders finance construction and rehab projects, so they do not require move-in-ready property conditions.

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Hard Money Loan FAQs

If you're looking for a short-term loan to quickly resell a property, a hard money loan can help. To find the best hard money loans, start with local hard money lenders to see what they have to offer.


However, it will come with a higher interest rate than a traditional loan, and it's a good idea to plan ahead for refinancing if you intend to hold the property for rental. They are also secured loans, so you need to be confident in your ability to repay them so you don't lose your property.


If you're looking for something longer-term and steadier, Visio Lending has options for expanding your portfolio of single-family rental properties. We can provide a low-interest rate and reasonable repayment terms. We also have various investor resources, such as a mortgage calculator and investment decision tutorials.

The biggest differences are the loan requirements and interest rates. A traditional mortgage will offer the lowest rates but the most stringent requirements. It will also require a large amount of financial documents for both your business and personal finances. On the other hand, hard money loans have higher interest rates yet much simpler qualifications than a traditional loan.


Another big difference is the use case. Although you can use conventional financing to purchase investment properties, the properties have to be rent-ready. Traditional lenders do not finance construction projects or flip properties.

Hard money loans are ideal for investors who are working on a construction or fix-and-flip project. If you need more money to complete your flip project, you can also explore personal loans from a variety of unsecured consumer lenders.

There's no set credit score requirement for a hard money loan, and not every lender will ask for a credit history. However in most cases, the lowest credit score you can have is 600. 

The average interest rate is between 10% and 18%, but your interest rate may be as high as 25% if you don't have a good credit score. Before securing a hard money loan, improve your finances to get the best interest rates.

Hard money loans typically have terms of around 6-24 months. However, they can be as short as three months or as long as 36 months. This is a much shorter repayment period than traditional mortgages, which is why the interest rates are higher.