Short terms, high rates, heavy points, fast foreclosures, and equity stripping. What hard money borrowers need to know before they sign.
Hard money lending is asset-based short-term financing. The lender is primarily concerned with the value of the real estate being pledged as collateral, not the borrower's credit score or income. This makes hard money loans accessible to borrowers who can't qualify for conventional financing, but that accessibility comes with severe conditions.
Hard money loans are used for fix-and-flip projects, land acquisition, distressed property purchases, and situations where speed of closing matters more than cost of capital. The appeal is real: hard money lenders can close in days where conventional lenders take months. But that speed and flexibility is priced into the loan, and the pricing is substantial.
The published interest rate on a hard money loan is only part of the cost. Most hard money lenders charge origination points on top of the rate. A loan at 12% with 3 origination points and a 1-year term has a total cost of 15% in the first year, plus whatever inspection fees, servicing fees, and exit fees apply.
If the project takes 18 months instead of 12, the borrower either needs to refinance into another hard money loan or pay an extension fee. Extensions typically cost 1-2 additional points, which adds another 1-2% of the loan balance. A fix-and-flip that takes 18 months with 3 origination points, 12% annual interest, and a 1-point extension fee effectively costs 22-24% of the loan amount over its life before any profit is possible.
Most hard money loans mature in 6-24 months. That is not much time to acquire a property, renovate it, and either sell or refinance. When the project takes longer than anticipated, which is common in construction and renovation, the maturity date arrives before the exit is available.
Hard money lenders do not have the same incentive as conventional lenders to work with a delinquent borrower. For many hard money operations, a default is an opportunity. If the borrower has built equity during renovation, a foreclosure gives the lender access to that equity. Hard money lenders can and do use this leverage.
Hard money loans structured as commercial transactions avoid many of the consumer protection provisions that apply to residential mortgages. In non-judicial foreclosure states, a lender can complete a foreclosure in 30-90 days after default. There is no 120-day waiting period required under the Consumer Financial Protection Bureau rules that apply to residential mortgages.
A borrower who misses a payment on a hard money loan and cannot cure quickly can lose the property in weeks. This is not a hypothetical. Hard money lenders in investor-friendly states exercise this right regularly, and the pace of foreclosure leaves borrowers little time to respond, find alternative financing, or sell the property before the lender takes control.
Equity stripping through hard money is a pattern where repeated loans, high fees, and compounding costs systematically eliminate a borrower's equity in a property. A borrower who takes multiple consecutive hard money loans on the same asset, each with origination fees, exit fees, and high interest, can end up with less equity than when they started even if the property's value has increased.
Some hard money lenders specifically target borrowers in distress who have significant equity, knowing that a default gives them an asset worth more than the loan balance. The loan terms are set to make default likely, and the result is an equity transfer from the borrower to the lender disguised as a financing transaction.
Not all hard money lenders operate this way. There are reputable hard money lenders who price fairly, structure terms reasonably, and support borrowers through challenges. The problem is that there are also predatory operators, and the regulatory environment offers little protection. The responsibility for due diligence falls almost entirely on the borrower.
Before accepting any hard money loan, a borrower should have an independent party review the term sheet and loan documents. The review should specifically address total cost over the expected hold period, what happens if the hold period extends, what the lender's rights are upon default, and what the realistic exit options are if the original plan doesn't materialize.