Hard money loans

A hard money loan is a short-term loan, commonly 6 to 18 months, that a private or specialist lender makes mainly on the property and the project rather than on your income. Investors use it to buy a house that needs work and pay for the renovation, then repay it by selling the house (a flip) or by refinancing into a long-term rental loan such as a DSCR loan. It costs more than a mortgage, commonly about 9% to 13% interest plus 1 to 3 points, because it is fast, flexible and short.

You will also hear it called a fix-and-flip, rehab or bridge loan; the names overlap.

How a hard money loan works

A hard money lender cares most about the house: what it is worth now, what it will be worth after the work, and whether your budget and timeline are believable. Your credit and experience mainly set the price and the leverage; there are no tax returns or debt-to-income ratio as on a home loan.

The loan is interest-only: you pay interest each month and the whole balance at the end, when the house sells or is refinanced. The renovation money is usually held back at closing and released in draws as the work is done. And because the valuation and underwriting are lighter than a mortgage's, hard money commonly closes in one to three weeks, fast enough to compete with cash buyers.

These are business-purpose loans on investment property, and federal consumer mortgage rules generally do not apply to them, so you will not get the standard consumer disclosures. Read the note yourself: how interest is charged, the fees, the maturity date, and the extension and default terms.

How lenders size the loan: loan-to-cost and the ARV cap

Two limits decide the loan, and the lower one wins.

• Loan-to-cost (LTC) is the loan divided by your total cost, the purchase price plus the renovation budget. Commonly 80% to 90%, often built as a share of the purchase (commonly 80% to 90%) plus most or all of the renovation.
• The after-repair value (ARV) cap holds the total loan to a share of what the house should be worth when the work is done, commonly 65% to 75%. The ARV comes from recent sales of renovated homes nearby, and the lender's valuation, not yours, is the one that counts.

First projects usually get the bottom of these ranges and a down payment of commonly 10% to 25% of the purchase price. Experience moves you up: lenders count completed flips and rentals you have owned.

The 70% rule of thumb is built on this same math: a maximum offer of 70% of the ARV minus the repairs, here $210,000 less $45,000, or $165,000. The one percent rule and its cousins explains where the rule helps and where it misleads.

What it costs: rates, points and fees

Two details change the real cost more than the headline rate. Some lenders charge interest on the full loan from day one, including renovation money not yet released, while others charge only on what has been drawn. And points are paid up front, so on a six-month loan they weigh far more than on a 30-year one. Compare lenders on total dollars for your timeline. Experienced flippers in forum threads add that a sound project can carry a point or two more and still work, while a thin one fails at any price.

How the renovation money is paid: holdbacks and draws

Before closing, the lender reviews your scope of work, a line-item budget of what will be done, by whom and for how much. The renovation money it agrees to fund is held back, then paid out in stages:

1. You or your contractor finish a stage of work and pay for it.
2. You request a draw.
3. An inspector, often working from photos or a video walk-through, confirms the work is done.
4. The lender reimburses that stage, less any draw fee, commonly within a few days.

Because draws repay work after it is done, you need cash for the first stage and the gaps between stages. If a contractor asks for a deposit, tie it to materials delivered. Plan a contingency of 10% to 20% of the renovation budget on top: older houses hide things behind the walls, and lenders rarely raise the loan mid-project.

What hard money lenders ask for

• The deal. The contract, the scope of work and budget, and sales that support the ARV.
• Your cash. Statements covering the down payment, closing costs, points, some months of interest and the renovation cushion.
• Your track record. Completed projects, if any; many lenders take a first project with more down and higher pricing.
• Credit, which mostly sets pricing and leverage.
• An entity and insurance. Often an LLC with your personal guarantee, and a policy suited to a vacant house under renovation.
• The exit. A sale or a refinance, on paper.

The exit: sell it, or refinance into a DSCR loan

Lenders underwrite the exit as hard as the house, and so should you.

Selling

A sale pays off the loan from the proceeds at closing. Budget selling costs of roughly 6% to 8% of the price for commissions, title and closing costs, and price the house to sell within your loan term. Profit on a property held a year or less does not get long-term capital gains rates, and frequent flipping can be taxed as a business. This is general information, not tax advice; talk to a CPA before your first sale.

Refinancing into a DSCR loan

Keeping the house means replacing the hard money loan with a 30-year rental loan sized on the new value. This is the refinance step of the BRRRR method. What the DSCR lender checks:

• Seasoning. How long you must have owned the house before the lender uses the appraised value rather than what you paid: commonly 3 to 6 months. Some lenders lend on value sooner once the work is documented; others hold the value to your cost plus documented improvements until the period passes. Get the rule in writing before you buy.
• Cash-out leverage. Commonly 70% to 75% of the appraised value, 80% only at the top credit tiers. Cash-out refinancing a rental covers the limits.
• Rent coverage. A signed lease and proof of the first rent and deposit, with the rent covering the new payment, commonly at a ratio of 1.00 or more.
• The appraisal. A full appraisal with the appraiser's market rent. Give the appraiser an itemized list of the improvements, with receipts and before and after photos; rental property appraisals explains what they look at.

When the numbers go wrong, and how to protect yourself

• The renovation runs over. Keep the contingency, get fixed bids for the big items, and permit the work: an unpermitted fix can surface in the buyer's inspection.
• The timeline runs over. Every month costs interest and holding costs; know what an extension costs before you close.
• The house sells for less, or slowly. Price from recent sales, not the best one, and know whether it could rent at a number that covers a DSCR payment.
• The appraisal at refinance comes in low. Your cash stays in longer. Buying well below the ARV is the real protection.
• The lender changes course. Forum threads describe valuations revised late, terms changed mid-process and slow draws. Ask other investors for references and get the term sheet, fees and draw process in writing.
• Too much borrowed money. A second loan for the down payment leaves no cushion, and many first lenders forbid it.

Hard money compared with other ways to fund a project

Many investors combine them: hard money to buy and renovate, then a DSCR loan to hold. Before you commit to a house, the value calculator gives a quick first estimate of the after-repair value, the deal calculator tests the rental numbers, and a quote shows what the refinance could look like. The investor paths walk a flip and a flip-to-rental week by week.

General education, not financial, tax or legal advice. Figures are examples: rates, rules and programs change, and every lender sets its own. Last checked November 4, 2026.