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A hard money loan is a short term real estate loan used by house flippers to purchase and renovate properties. A hard money lender provides the capital the investor needs to purchase the property, complete high ROI renovations, and thereby increase the after repair value of the home.

Crucially, the real estate investor is required to pay back the full loan amount at the end of the loan terms (usually 12-24 months).  Usually, the funds from the sale of the house are used to pay back the full loan amount.  

In most cases, hard money lenders will provide 70 to 90% of the funds needed to complete the project, meaning that the house flipper is responsible for covering the shortfall. 

For hard money loan to work successfully, the after repair value of the property must be substantially more than the original purchase price. 

In addition, it’s also worth clarifying that there several different types of hard money loans, including:

• Fix and Flip Loans
• Rental Loans
• Construction Loans

Hard Money Loan Monthly Payments only cover the interest portion of the loan. This means that with each monthly payment, you don’t make a dent in the total capital that was borrowed. Instead, the expectation is that you will pay back 100% of the capital, when the hard money loan terms come to an end.

For example, let’s imagine you applied for hard money financing to the value of $150,000, with an interest rate of 10% and a loan term of 6 months. In this case you would pay:

• Month 1: $1250 ($150,000 * 10% / 12)
• Month 2: $1250
• Month 3: $1250
• Month 4: $1250
• Month 5: $1250
• Month 6: $1250
• End of the loan: $150,000

As you can see from the hard money loan example above, you only pay off the interest portion of the loan each month. You repay the full capital amount when the loan expires, using the funds from the sale of the house that was flipped to do so.

Apart from a higher interest rate, this is one of the main ways in which hard money loans differ from traditional loans. With a traditional loans, the monthly payment is a mixture of the interest owed and the outstanding capital amount. This is what allows the borrower to pay off their entire mortgage over time. The borrower basically chips away at the capital month after month and year after year. When the loan comes to an end, there is no more capital to pay off.

This traditional financing approach doesn’t work for house flippers, because of the cash flow challenges that it would introduce. Conversely hard money lending provides a short term loan solution for property investors that need to successfully execute a real estate deal.

Hard Money Loan Rates typically range from 7.5% to 15%, depending on the hard money loan lender that you choose, the borrower‘s creditworthiness, and the amount of house flipping experience that the investor has.

In most cases, these three attributes will have a massive impact on the final rate that is offered to you. Generally speaking, the better your credit history and the more house flipping experience you have, the lower the hard money loan rate will be.

In most cases, the house flipper is required to put down between 10% and 20% of the project cost in order to initiate a hard money loan. For example, if the hard money lender covers 85% of the project cost, the investor would need to cover the shortfall of 15%.

On average, real estate investors need a 650 credit score. Compare that to the average 680 – 750 credit score traditional lenders require and it’s easy to see why hard money loans are a great option.

If you plan to keep the home and rent it out, you may find credit score requirements to be a little higher – usually around 660 only because the risk is higher.