Hard money vs conventional financing

A short-term loan secured by real estate, made by a private lender rather than a bank, and underwritten mainly against the property rather than against you. The lender's core question is not can this borrower afford the payments but if this goes wrong, can I sell the collateral for more than I lent.

That single difference explains everything else about the product: it funds in days instead of weeks, it tolerates credit and income situations a bank will not, it is priced at 8.0% to 15.0% instead of mortgage rates, and it is written for 6 to 24 months rather than 30 years.

Three reasons, in order of how often they are the real one. Speed: a seller wants to close in ten days and a bank cannot. Condition: the property will not pass a conventional appraisal because it has no kitchen, so no conventional lender will touch it. Situation: the borrower's tax returns, credit, or entity structure do not fit an underwriting box.

Notice that none of those is the money is cheap. Hard money is expensive money that buys you access or speed. If you do not specifically need access or speed, you are paying a large premium for nothing.

It is a good idea when the cost of the money is smaller than the value of what the money lets you do, and a bad idea in every other case. That sounds obvious and it is routinely ignored, because the cost is quoted as a rate and the benefit is imagined as a profit.

Concretely: if the loan costs you $18,000 all-in over six months and it lets you capture a $60,000 spread you could not otherwise reach, it is a good idea. If it costs $18,000 to chase a $22,000 spread that assumes the rehab runs on schedule and the ARV holds, you have bought yourself a job with downside. Run it through the true-cost calculator before you decide, not after.

From the lender's side this is a different question entirely - it is asking about investing capital in these loans rather than borrowing them. We do not cover the investor side of the trade, and note only that private lending funds are securities-adjacent, frequently illiquid, and not covered by deposit insurance. Talk to someone licensed before you put money in.

Speed to close, measured in days rather than weeks. Willingness to lend against property a conventional lender will reject on condition. Underwriting that weighs the deal more heavily than your tax returns. Rehab funds available as a holdback, which no conventional purchase loan offers. And leverage on a purchase price that would otherwise need all cash.

Every one of those is a genuine benefit. All of them are paid for in the fee stack.

The honest list, roughly in order of how often it actually bites people:

The clock. Terms run 6 to 24 months. Rehabs run late. When the term ends and the property is not sold or refinanced, you pay an extension fee, or you default. Cost compounding on delay. Every extra month adds interest, carrying costs and possibly an extension fee at once. The exit not existing. A BRRRR that assumes a refinance at a certain value fails entirely if the appraisal comes in low. Recourse. Most hard money loans carry a personal guarantee, so the downside is not limited to losing the property. Speed of foreclosure. In non-judicial states a private lender can move far faster than a bank.

No, though they are often sold by the same lenders and confused constantly. A DSCR loan is long-term rental financing - typically 30 years, amortising, qualified on the property's cash flow instead of your tax returns. Hard money is short-term, interest-only, asset-based bridge capital. They are complements, not substitutes: hard money buys and renovates the property, the DSCR loan takes it out.

Rates above conventional owner-occupied pricing, prepayment penalties that are common and sometimes steep, a hard floor on the debt-service ratio that a vacancy can breach, and reliance on a market-rent opinion that may not match what you actually collect. It is still usually far cheaper than staying in hard money.

For the borrower, the risk concentrates in the term ending before the exit is ready, and in the personal guarantee that usually sits behind the loan. For the lender, the risk is a collateral value that turns out to be wrong. The product is not inherently dangerous; a short term against an uncertain exit is.