What is a hard money loan for an off-market deal?
How It Works
Hard money lenders focus on the value of the property more than the borrower's credit history. Loans usually last one to three years, and interest rates and fees are often higher than a traditional mortgage. Terms vary widely from lender to lender.
Most lenders also want a down payment, a clear exit plan, and a written scope of work for any repairs. They may release funds in stages as the work is completed.
- Shorter term, often one to three years
- Higher interest rates and upfront points
- Funds may be released in draws
- An exit plan such as refinancing or selling
When It Makes Sense
Investors often use hard money for a fixer-upper that a bank would not finance in its current condition. It can help close quickly when a seller needs certainty. It is a tool best suited to buyers with a clear plan.
Before you sign, calculate total costs including points, interest, insurance, and holding costs. Ask how fast the lender can close and what happens if the project runs late.
Consider the full project timeline before you borrow. Delays in permits, contractor schedules, or material costs can extend interest charges. Build a cushion into your budget so a short setback does not become a financial problem.
Common mistakes
- Borrowing without a realistic plan to pay the loan off.
- Comparing only the interest rate and ignoring total fees.
