Taking out a hard money loan can be a one-way ticket to financial disaster. It’s a legitimate tool in the right situations, but there are many risks. This blog aims to help you learn the specific scenarios where this high-risk tool makes sense.
Getting a hard money loan can start with a phone call. A friend may reach out to tell you about an investment opportunity you simply “can’t pass up.” Maybe it’s a fix-and-flip property that had just gone on the market. You turn to a hard money loan to secure the property quickly, knowing that approval may be based more on the deal itself than your credit score.
What you may not understand is that hard money loans come in different shapes and sizes. Making the wrong choice can lead to nothing but trouble.
Key Takeaways
- The phrase “hard money loan” describes short-term, asset-based financing secured by real estate. Lender consideration usually focuses more on the property than your credit.
- These loans can be funded fast, but they’re expensive and risky. Miss payments and you can lose the property.
- Despite how they’re commonly phrased, most “hard money personal loans” aren’t really personal loans. They’re loans secured by real estate and used by property investors.
- If you have bad credit, a hard money lender may approve your funding request, but it’s only a good idea if the collateral and your exit plan make sense.
- For personal expenses or debt relief, consider safer consumer options first, then run the numbers before signing anything.
What Is a Hard Money Personal Loan?
A hard money personal loan is a capital secured with real estate. They’re often used in real estate ventures, both for bridge financing and for flipping houses. Rather than focusing on your own creditworthiness, hard money lenders focus on the marketability of your property. That said, a financial institution offering this type of financing may still look at credit.
Experts describe hard-money lenders as firms that service short-term real estate loans, typically for purchase and rehabilitation. They’re known for higher fees and interest rates than bank mortgages.
What’s risky about them is where they come from and what can happen if you don’t pay. In most cases, they come from private investors and lending groups, not banks. If you don’t pay, you can lose the real estate used as collateral.
We’ll get into the risks and the mistakes that are easy to make a little later. First, let’s dig deeper into how the loans are meant to work.
How Do Hard Money Loans for Bad Credit Work?
Potential borrowers apply for a hard money personal loan similar to other financing requests. If the lender approves the application, and the applicant agrees to the loan terms, here are the next steps:
- Payments are often interest-only during the term, and then you repay the principal in one lump-sum payment at the end. The Consumer Financial Protection Bureau warns that a larger final payment (also referred to as a “balloon payment”) can be risky. If you cannot make that final, bigger payment, then you face bad options like having to refinance, sell your house, or foreclose.
- The loan is asset-based, meaning the primary factor for approval is the value of the backing real estate and how realistic your exit strategy (sale or refinance) looks.
- You pay the money back much faster than with a mortgage, with loan terms ranging from a few months to a couple of years.
Tips on Using a Hard Money Loan
- Start with the exit, not the entrance. Know exactly how you’ll pay it off — sell, refinance, or both — and build timelines with buffers.
- Underwrite the deal yourself. Verify after-repair value with multiple comps, walk the property, and price the rehab with line-item bids.
- Talk to multiple lenders. Personal hard money lenders vary in fees, points, and timelines. Request a full fee sheet and who pays what at closing.
- Bring real cash. Plan for a down payment and a contingency fund. Don’t count on the first draw to cover everything.
- Document the basics. Hard money lenders still want bank statements, a project budget, a scope of work, and experience or a strong team.
- Avoid advance-fee traps. Legitimate lenders don’t ask you to wire large “processing” fees before underwriting is complete.
- Before you sign anything, run the math in a debt payoff calculator to see what your monthly obligations look like.
Some applicants have bad credit, but they may feel that the investment opportunity is too good to pass up, even if it means taking on an expensive loan. Not everyone who uses this form of lending has bad credit, but because the loan is secured against property, it attracts borrowers who need quick cash and may not qualify for bank financing with a fast turnaround.
A Quick Reality Check from the Data
Before you borrow, it helps to take a step back. New York fed researchers showed that while delinquency rates are stabilizing, the numbers are still elevated overall. In fact, 4.5% of outstanding debt is in delinquency. The report shows that transitions into serious delinquency have increased across most debt types. In other words, carrying expensive, short-term debt is still hard to juggle for many borrowers
How Hard Money Loans Differ from Other Loans
Hard money loans aren’t the same as mortgages from banks or unsecured personal loans. In those cases, banks or lenders typically consider your income, debts, and credit score. Hard-money lenders look at collateral first and price funding for speed and risk. That usually means higher fees, increased rates, and lower maximums on how much of the property’s value they’ll lend.
Most hard money personal loan lenders target investors and business-purpose deals secured by property. If what you really need is to cover a small shortfall, diving into a real-estate-secured loan might be extreme. Instead, you may benefit from exploring ways to get $100 fast that don’t put property at risk.
Other Loan Types to Consider
Here are other paths that might make sense if you need an alternative:
- Bank or credit union bridge loans often offer lower points and interest, a win-win if you can qualify.
- HELOC or home equity loans can work if you already have a property with equity in it. However, if the loan goes south, you could end up losing the property.
- Unsecured personal loans don’t put property on the line, but rates can be high (especially with bad credit).
- If you’re dealing with a one-time surprise expense that’s closer to four digits, options like a $1,000 loan might be a better fit for your problem.
Those are just a few solutions if a hard money loan doesn’t work. There are many more out there, but it’s wise to speak with a professional to weigh your options before you jump into them.
Conclusion
Hard money can be a financial solution in the right hands, but it’s not a shortcut. The long way, planning, running the numbers, and lining up safer options, is how you actually get where you want to go. And when the pressure is coming from existing balances and not an investment opportunity, you may be better off focusing on a plan to get out of debt rather than adding a high-cost, short-term loan.
FAQ
Can I Get a Hard Money Loan with Bad Credit?
Possibly. A hard money lender’s bad credit approval hinges more on the property and the numbers than on your credit score. But lenders still look for the basics — down payment, reserves, and a credible exit plan.
Are There Hard Money Lenders for Personal Loans?
You’ll see that phrase online, but most lenders using it are actually offering real-estate-secured loans for investors. If you need funds for personal or household use, compare personal loans and other consumer products instead of hard money.
What Are the Risks of Hard Money Personal Loans?
Short timelines, higher fees, and the very real possibility of losing the property if things go sideways. They can work for experienced investors, but they’re unforgiving if you’re new or undercapitalized.
How Fast Can Funding Happen?
Faster than banks in many cases, sometimes within a few days if the title and appraisal are clean. Speed is the main selling point of hard money personal loans, but it comes at a cost.
What Should I Watch for When Vetting Lenders?
Check licensing where applicable, read the fine print on default clauses and fees, and beware of anyone demanding large up-front payments. If a deal sounds too good to be true, walk.