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How Do Hard Money Loans Work?

How Do Hard Money Loans Work
Hard money loans work by lending on the asset, which is the property or land. If for some reason a borrower cannot repay the loan, the real estate property (asset) can be taken back and sold. Because of this, hard money loans do not have requirements for a high credit score or income. While it might be preferred that fund borrowers have a 600+ FICO score, projects can still be funded if a score is below that range.

What is a Hard Money Loan?

A hard money loan is a short-term loan that is used to acquire investment properties to rehab and then flip for resale or rent. This specific type of asset-based loan financing is used by real estate investors and others who are looking to finance non-owner-occupied real estate. The real estate involved with hard money loans can include apartments, single-family homes, multi-family homes, commercial buildings, industrial buildings, and mixed-use buildings.

Because hard money loans are short-term, they typically last one to three years. However, we do provide extensions up to 6 months and longer on a case-by-case basis.

Hard money loans can be used by real estate investors or individuals for:

  • Acquiring and renovating properties that traditional banks won’t finance (due to your credit or the property’s condition)
  • Quickly refinancing an existing mortgage on a property that is approaching its maturity date
  • Obtaining almost immediate cash-out refinancing by using an already-owned property collateral
  • Financing real estate transactions that require a fast closing, which traditional banks might not be able to accommodate
  • Acquiring a property under the name of a Limited Liability Company (LLC)

How Are Hard Money Loans Different From Traditional Mortgage Loans?

Hard money loans are different from traditional mortgage loans in several ways. First, hard money loans are typically shorter in duration, often ranging from a few months to a few years, whereas traditional mortgages are long-term loans typically spanning 15 to 30 years. Second, hard money loans lend on the asset, whereas traditional mortgages consider the borrower’s creditworthiness and income.

Hard money loans offer several key advantages over traditional mortgages. Specifically, hard money loans are known for their quick approval process, providing fast access to funding, making them ideal for time-sensitive real estate investments. Hard money loans are also more flexible in credit requirements, as they primarily consider property value rather than the borrower’s credit history, enabling individuals with less-than-perfect credit to secure financing. There is also flexibility with the tenor of the loan, as extensions are often available and granted.

Hard money loans can also be used for properties in need of renovation, whereas traditional mortgages often require pristine conditions. They also provide short-term financing options, aligning well with investors who plan to buy, improve, and resell properties quickly. Lastly, hard money loans typically involve less documentation, simplifying the application process. 

Who Needs a Hard Money Loan?

  • Real Estate Investors: Hard money loans are frequently sought by real estate investors who require quick financing for property purchases, renovations, or time-sensitive investment opportunities.
  • Borrowers with Poor Credit: Individuals with less-than-ideal credit histories and a lower FICO credit score might turn to hard money loans when traditional lenders are unwilling to provide financing.
  • Property Flippers: House flippers often use hard money loans to acquire properties, make necessary improvements, and then sell them for a profit.
  • Developers: Real estate developers might utilize hard money loans to acquire land or fund construction projects when traditional financing options are unavailable or time-consuming.

Who Needs a Hard Money Loan?

Many hard money loans can be approved as quickly as 3 to 5 days, which is much faster than traditional loans from banks that often take weeks or longer. The application process typically involves:


Property Evaluation: Hard money lenders assess the value of the property you intend to use as collateral.


Loan Application: Once ready to apply for a loan, you submit an application to the lender, including details about the property, your credit history, and your financial situation.


Down Payment: You will be required to make a down payment, typically ranging from 20% to 35% of the property’s value. Each down payment is calculated based on the Loan-To-Value (LTV) ratio of the property. 


Exit Strategy: Lenders often want to know your plan for repaying the loan, which could involve selling the property, refinancing with a traditional mortgage, or other means.


Loan Approval: If your hard money loan is approved, the loan amount will be provided, and you’ll need to adhere to the agreed-upon terms.


Specifically, the exact requirements for the loan will include a: 


  • Down Payment (as mentioned above)
  • Appraisal (ordered by West Forest Capital, the private money lender)
  • Insurance Policy (West Forest Capital should be the loss payee and additional insured)
  • Builder’s Risk Insurance (for extensive rehab projects)
  • Lender Title Insurance (with West Forest Capital as the beneficiary)
    While a FICO credit score of 600+ is preferred, it’s still possible for projects to be funded with a score below this amount. 

Can I Use a Hard Money Loan to Purchase My Primary Residence?

No, hard money loans are used for investment property real estate investments, fix-and-flip projects, or commercial real estate ventures.

What are the Risks of Hard Money Loans?

The primary risk with a hard money loan is that if you fail to repay the loan as agreed, you risk losing the property or land (asset) used as collateral. Additionally, this type of loan will typically have high-interest rates.

What are the Typical Interest Rates on a Hard Money Loan?

Interest rates on hard money loans are typically higher than those on traditional mortgages. Rates vary based on the underlying treasury and conventional mortgage rates but often start at 10%, and can go up to 13%, depending on the lender, the borrower’s risk profile, and the specific terms of the loan. The higher rates reflect the increased risk for hard money lenders.

Hard Money Loans with West Forest Capital

West Forest Capital provides funds to real estate investors and others looking to finance non-owner-occupied real estate. We fund property types that include apartments, single-family, multi-family, commercial, industrial, and mixed-use buildings. 
We provide rehab funds, or full construction costs, as needed. We also provide fast closings, almost always less than 12 days, and often as quick as 3 to 5 days. We’ve even previously closed a brand new loan in one day. 
We lend in New Jersey, New York, Connecticut, Rhode Island, New Hampshire Massachusetts, Pennsylvania, Georgia, and Florida.

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