Real estate investors don’t always have the luxury of getting approved for a traditional small business loan. Whether it’s a low credit score, a spotty payment history, or lack of downpayment, you may find it challenging to find financing. One option to consider: a hard money loan. Here we share how hard money loans work and places to find them.
What is a Hard Money Loan?
Typically hard money lenders are private lenders (or private money lenders) looking for a high return without having to rehab or purchase a property themselves. They are most interested in the fundamentals of the deal: the property’s value or, in particular, the after repair value or ARV.
Do hard money loans require down payment?
Many real estate investors are looking for deals that involve no money down. That may be possible with private money loans if the fundamentals of the deal justify it. These are short-term loans so you may not even have to make monthly payments if you sell the investment property quickly enough.
There are a few lenders that offer 100% financing so you don’t have to bring your own money to the deal. Others may offer up to 90 to 100% of the purchase price and 100% of the rehab budget, as long as that will total less than 70-75% of the ARLTV (after repair loan-to-value).
Do you need good credit for a hard money loan?
Not necessarily. With a hard money loan, the lender or investor is typically more interested in the property than in the borrower’s credit score. That makes it a more flexible option for some investors. Some lenders require a credit check, though, and some have minimum credit score requirements. Make sure you understand the lender’s policy.
Best Hard Money Loans for Real Estate Investors
Here are some of Nav’s top picks for hard money and fix-and-flip lenders.
Do Hard Money
When you’re looking for 100% hard money financing, Do Hard Money should be one of your first stops. First off, they can actually do 100% financing for your fix and flip project, a rarity in the hard money sphere. They don’t require any credit or experience in the underwriting process, and don’t have a minimum requirement for a downpayment.
As with any hard money lender, Do Hard Money can’t and doesn’t guarantee a profit on any flip, but they do report a healthy average profit of $33,578, a solid start for new flippers and a strong cog in the machine for experience flippers looking to add a chunk of cash to their business.
While hard money loans usually average around 10-15% interest, Do Hard Money charges interest at a rate of 1.25-1.5% per month for the loan term, and doesn’t charge prepayment penalties. For qualifying and able borrowers, that can equal solid savings on interest and more money back into your business.
Do Hard Money also boasts a slightly faster-than-average funding time of 12 days, meaning you can have the money for your project at least a few days faster than with other lenders.
While Do Hard Money doesn’t require a minimum down payment, they will charge their fees up front, one of the main pain points for those who have had negative experiences with the lender.
Do Hard Money Rates and Terms
|Property Types Financed||Non-owner occupied|
|Loan Amount||$50,000 – $5 million|
|ARV||70% (minimum of $75,000)|
|Interest Rates||1.25- 1.5% per month (around 15% average)|
|Fees||Points: 5.5 to 6.5; no prepayment penalty|
|Loan Terms||Up to 5 months|
|Time to Fund||Average of 12 days|
While they don’t claim to be able to offer 100% fix and flip financing, LendingOne can cover up to 90% of purchase and rehab costs, up to $4 million. With an emphasis on user-friendliness, they add a level of simplicity to the application process.
LendingOne’s Fix-and-Flip loans are advertised as “interest only” over a period of up to 12 months. Their interest rates are some of the best in the fix-and-flip sphere, as low as 7.49%. To qualify for the best rates and longest terms, you’ll want to come in with a personal credit score of at least 620 and have at least six months worth of cash reserves on hand.
They also offer 10-day funding time on smaller unit fix and flips, but this time may be longer for long-term loans or for ground-up construction projects. Overall, the simplicity of the application process and overall solid terms make LendingOne a great option.
LendingOne Rates and Terms
|Property Types Financed||Non-owner occupied, also have rental property loans available|
|Loan Amount||$75,000 – $4 million|
|ARV||Up to 75%|
|Interest Rates||Starting at 7.49%|
|Fees||Origination fees from 1.75-3%|
|Loan Terms||Up to 12 months|
|Time to Fund||As low as 10 days|
Amza Capital is one of the leaders in the hard money lending space, and have the specs to continue holding their own. They require a minimum personal credit score of 650 for consideration, and a higher score to qualify for some of their better terms and rates.
They prefer to work with experienced flippers, so if this is your first time, be sure to work with a mentor or a licensed contractor to beef up your resume during the application process.
Amza also offers a fix and flip credit line with a much higher credit limit (up to $25 million), fixed rates and terms up to 24 months for flippers with multiple projects going on
With terms generally around 12 months, rates between 7-12%, and closing costs around $995, Amza should be on your mind when you’re looking for a lender.
Amza Capital Rates and Terms
|Property Types Financed||Non-owner occupied|
|ARV||Up to 80%|
|Loan Terms||Up to 12 months|
|Time to Fund||2 weeks|
How to Get 100% Financing with a Hard Money Loan
Not all hard money lenders offer the same types of loans to everyone. While you might get approved for a hard money loan, you might not get approved with 100% financing. Luckily, there are a few ways to make sure you get 100% financing on your project.
- Make sure your deal is less than 70% ARV. Your ARV, or after repair value, should be less than 70%. That includes the property purchase price, rehab and loan costs.
- Keep a solid credit score. While a good credit score is helpful to get a traditional loan, it’s also a good idea to have one for a hard money loan. You can still get a hard money loan with fair or poor credit, but you might not get 100% financing.
- Have some experience. Many hard money lenders won’t give money to borrowers if it’s their first time flipping a house. Having the experience of house-flipping can be in your favor.
- Be flexible in coverage. Some hard money lenders will cover the purchase price, but not other expenses (like repair costs, for example). You might have to cover some of the costs out of pocket (maybe business or marketing costs). With that being said, 100% financing might be different, depending on the lender.
- Consider the limit. Don’t be surprised if a hard money lender has a maximum loan amount you can get. If your property is worth more than the limit, you might be able to get the max loan amount, but not have it cover all your necessary costs.
How to Fund Your Down Payment if Your Lender Requires One
Traditional mortgage lenders usually require a down payment. Hard money lenders aren’t obligated to, but some do. If your hard money lender requires some upfront cash, you could get it from a few different places, including:
A business credit card
You may be able to use funds from a small business credit card either as a down payment or to finance repairs. Keep in mind that there are typically fees associated with taking out a cash advance, and APRs for cash advances are higher than what you’d pay on your regular purchases. Some credit cards offer 0% balance transfers for 6 to 18 months, and allow you to deposit those funds into your bank account. This can be a cost-effective way to help finance your property. (Remember that after you get your hard money loan, you’ll be responsible for paying back your loan as well as your advance at the same time.)
A personal loan
A personal loan can be used for anything, including a down payment on a home that you might not live in. Interest rates on personal loans are usually lower than those on credit cards, but they vary depending on your lender and creditworthiness. Personal loans heavily weigh your credit score when considering you as a borrower, which means that the lower your credit score, the higher your interest rate. Like a credit card cash advance, you’ll be paying off your personal loan as well as your hard money loan at the same time, which could mean your bank account can take a huge hit.
Family and friends
If you don’t have the financial history to prove your creditworthiness, you might have better luck with those that personally know you. Try asking family and friends for down payment cash. They’re more likely to be lenient on repayment options, which means you might not have to make two loan payments at the same time. Even so, you should have some sort of contract in place that details your loan, interest rate (if any), repayment plan, and any fees, if your loved ones want to implement them. Have a deadline in place so both you and your relatives know when the money should be paid back in full.
A home equity line of credit can be helpful if you already have a primary residence. Your home is used as collateral, and there is less red tape to go through. Interest rates tend to be lower since your home is used to secure the loan, similar to a hard money loan. If you don’t make timely payments on your HELOC, though, your home can be seized. Use this if you’re confident in making payments to both a HELOC and your hard money loan at the same time.
A personal line of credit, similar to a HELOC, might be a better idea if you don’t have a home to use as collateral. It’s still a revolving line of credit, but you might face higher interest charges compared to a HELOC since it’s an unsecured line. It also means your credit score and credit history are more heavily scrutinized to see if you’re worthy of lending money to.
You can use your retirement savings as a down payment in a few different ways. You can take out a 401(k) loan — if your provider allows it — and make payments according to the terms your 401(k) provider sets. You could also use a distribution from your 401(k) if you’re using it as a first-time homebuyer, which means you don’t have to repay it. Generally, though, you should skip taking money from your future self, because there’s no way to make up for the money you’ve earned due to contribution limits. Even if the amount you’re borrowing isn’t that much.
Business loan or line of credit
For house-flippers that do this full-time rather than on the side, you might have a full-fledged business to run. If you need a down payment for your hard money loan, look into a small business loan or line of credit. Business lines of credit, like HELOCs and PLCs, allow you to borrow only what you need. In this case, just enough for a down payment. As a company, you may qualify for this alternative funding method.
Should You Get a Hard Money Loan?
Before you jump to an application, make sure getting one is the right decision.
- Is it for flipping a house? Short-term financing, like flipping a house or updating a rental property, would be a good time to look into hard money loans. If you’re looking to buy a home to live in, consider a conventional, FHA, or another type of traditional mortgage.
- Have you flipped homes before? If this is your first time house-flipping, you might not qualify for a hard money loan. This type of financing is better for someone who’s done this before, rather than someone who’s going into it cold.
- Do you have any cash for additional financing? Whether it’s for a down payment or covering what a hard money loan won’t, you’ll need to have funding from an alternative source for other things. Otherwise, you might have to resort to taking out an additional loan. If your property doesn’t sell right away, you might be on the hook for more money than you had originally planned. Having money for a down payment, or whatever a hard money loan won’t cover, might be the determining factor between getting approved and denied for a hard money loan.