Maybe you're a real estate investor who's short on cash to buy your next property. Or you need funding for your next fix-and-flip project. If you need short-term funding to buy a house, a hard money loan could be your solution — especially if you're struggling to qualify for other financing options due to your credit history.

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What is a hard money loan?

A hard money loan is a secured debt product that is backed by real property, or in this case, your house. You can access these loans through companies that specialize in them rather than through traditional mortgage lenders or banks. Real estate investors, house flippers, and home buyers with poor credit may qualify for these hard money loans.

Homeowners who purchase a new home while selling their current one also use hard money loans to seal the deal if their finances aren't strong enough to qualify for a bridge loan . The same applies to homeowners facing foreclosure, who have limited alternatives for relief.

How does a hard money loan work?

When you apply for a traditional mortgage loan, lenders assess your creditworthiness and other financial factors to determine your eligibility for funding.

Hard money loan lenders are willing to assume more risk and fund loans quickly in exchange for steep origination fees and higher interest rates.

Still, lenders consider how much equity you have in the home and your loan-to-value ratio (LTV) when you apply. Lenders also want reassurance that you can repay what you borrow. Consequently, they also assess your debt-to-income (DTI) ratio to gauge if you're a good fit for a loan.

As a result, hard money loans can be good for buyers or real estate investors who have equity and a steady income, but whose credit scores are too low to qualify for most regular types of mortgages.

Hard money loans are short-term loans, with term lengths ranging from a few months to a few years. Many companies let you make interest-only payments during this time, but when the term ends, you have to pay off the outstanding balance with a balloon payment.

Find out what credit score you need to buy a house.

Pros and cons of hard money loans

Pros

• More easily accessible:Hard money loans are available to individuals with negative credit histories, often due to issues such as bankruptcies.

• Interest-only payments:Some lenders let borrowers make interest-only payments during the loan term.

• Fast funding times:Hard money loans sometimes close in as little as one week, making them an attractive option for investors who need fast cash.

Cons

• Borrowing costs:Lenders generally charge higher interest rates and steeper fees to compensate for the increased risk associated with these loans.

• Foreclosure risk:Hard money loans use your home as collateral. If you're unable to make timely payments, you could lose your house to foreclosure .

• High down payment:To secure a hard money loan, you may need to put 20% to 35% down.

Learn how to buy a house after filing for bankruptcy.

How to get a hard money loan

Hard money loans may differ from traditional mortgage loans, but the process of applying for one isn't that different.

• Research hard money loan lenders.Identify at least three reputable options and confirm you meet their lending guidelines.

• Compare loan offers.Pay attention to mortgage rates, fees, and the overall cost of borrowing.

• Apply for a loan.Gather the required documentation and submit a formal application with your chosen lender.

Hard money loan lenders

Here are some hard money loan lenders that are available in most parts of the U.S. To help you find the best fit, we've listed the states where each company does not offer hard money loans. They are all available in Washington, D.C.

Hard money loan alternatives

Home equity lines of credit

A home equity line of credit (HELOC) is a type of second mortgage that is also good for people who have built equity in their homes. A HELOC is a revolving line of credit that you can withdraw from during the draw period, which usually lasts 10 years, and pay back during the repayment period, typically 20 years.

HELOCs are good alternatives to hard money loans because you only have to pay interest on the money you withdraw. So, if you don't use all of the funds you're approved to borrow, you don't have to pay interest on that amount.

It's possible to get a HELOC with poor credit if other aspects of your financial profile are strong and you have a lot of equity in your home.

Home equity loans

If you have a sizable amount of home equity, you can also convert it into cash with a home equity loan . This is another type of second mortgage, except you receive the funds in one lump sum. This can be convenient if you know how much you need off the bat to make a down payment on your investment property or second home.

Home equity loan rates are typically lower than those of other debt products, making them a potentially more affordable option. Shop around with home equity loan lenders to find the lowest rates.

Cash-out refinance

A cash-out refinance also allows you to tap into the equity of your home. It replaces your current mortgage with a new, larger one. This way, you receive the extra money and can use it as you see fit, such as funding the purchase of a new property.

Small business line of credit

Speak with your lender or business banker if you're considering adding the property to your portfolio. A small business line of credit may be a more viable option for obtaining the funding you need if you're a registered business owner trying to buy a commercial property.

Government-backed mortgages

Government home loans, including FHA, VA, and USDA mortgages, can be good for those considering a hard money loan for their primary residence, because they often accept lower credit scores. They also accept much lower down payments than hard money loans. So, if you don't qualify for a bridge loan to buy your next home, these are good options.

However, you cannot use these loans for investment properties.

FHA loans , backed by the Federal Housing Administration, allow credit scores as low as 500 with a 10% down payment, or 580 with a 3.5% down payment.

VA loans , backed by the Department of Veterans Affairs, help eligible military personnel buy a home with a 0% down payment.

You also don't need a down payment for USDA loans . These mortgages, backed by the U.S. Department of Agriculture, are designed for low- to moderate-income borrowers purchasing homes in rural areas of the U.S.

Find the best FHA loan lenders.

Hard money loan FAQs

Are hard money loans risky?

Hard money loans can be risky for both the lender and the buyer. They are for buyers and investors with poor credit histories, which labels them as "risky" to lenders. To offset that risk, companies charge high interest rates and require high down payments for hard money loans, which could strain buyers' finances.

What credit score do you need to get a hard money loan?

Hard money lenders assess your credit score when you apply, but the minimum threshold varies by company. Hard money loans also focus more on your home equity and income than on your credit. So, you could be eligible for funding even if you have less-than-stellar credit.

Do banks offer hard money loans?

Private entities and investors offer hard money loans. They are not available through traditional banks, credit unions, or mortgage lenders.

Laura Grace Tarpley edited this article.