MortgagesLetter H

Hard Money Loan (Asset-Based Private Lending)

A short-term, high-interest real estate loan funded by private investors or funds and underwritten primarily on the collateral value (ARV) of the property rather than borrower credit.

Overview & Practical Application

A Hard Money Loan is a short-term, asset-backed mortgage originated by private lending funds or syndicates rather than traditional FDIC-insured banks. Hard money financing is the primary capital source for real estate flippers ("fix-and-flip"), distressed property buyers, auction purchasers, and BRRRR (Buy, Rehab, Rent, Refinance, Repeat) investors.

Why investors use Hard Money despite higher rates: 1. Speed of Execution: While bank mortgages take 30 to 45 days to close, hard money lenders can underwrite and fund a transaction in 3 to 10 business days, competing directly with all-cash offers. 2. Distressed Property Acceptance: Conventional and FHA lenders refuse to lend on properties with missing kitchens, roof damage, code violations, or unlivable conditions. Hard money lenders specifically fund both the acquisition and a rehab holdback escrow to renovate distressed assets. 3. ARV Underwriting: Loan sizing is typically capped at 65% to 75% of the After Repair Value (ARV) or 80% to 90% of Loan-to-Cost (LTC).

Mathematical Formula & Calculation

Total Hard Money Holding Cost = (Loan Amount * Origination Points %) + (Monthly Interest-Only Payment * Holding Months)

Computes the total financing expense of a fix-and-flip hard money loan across the renovation and resale timeline.

Variable Definitions:

  • Origination Points %=Upfront lender fee (typically 1.5% to 3.0% of total loan commitment)
  • Monthly Interest-Only Payment=(Loan Amount * Annual Note Rate) / 12 (typically 10% to 13% annual interest)
  • Holding Months=Total months from purchase closing to resale or DSCR refinance payoff

Real-World Underwriting Example

Scenario: An investor borrows $300,000 in hard money at 11.00% interest-only and 2 origination points ($6,000) for a 6-month renovation and flip.

Calculation:
Upfront Points = $300,000 * 0.02 = $6,000.
Monthly Interest = ($300,000 * 0.11) / 12 = $2,750/month.
6-Month Total Financing Cost = $6,000 + ($2,750 * 6) = $22,500.

Takeaway: Total financing cost over the 6-month project is $22,500. Every extra month of construction delay costs the investor an additional $2,750.

Key Underwriting Takeaways

  • Structured as 6- to 18-month interest-only balloon notes designed for rapid renovation and exit (sale or DSCR refinance).
  • Underwritten primarily on the property’s After Repair Value (ARV) and the investor’s track record.
  • Construction speed is paramount because high monthly interest-only carrying costs quickly erode flip profit margins.
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Credit & UnderwritingLTC

Loan-to-Cost Ratio (LTC)

A commercial and construction lending metric that compares the total loan commitment to the total direct hard and soft costs of acquiring and building or renovating a project.

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Credit & UnderwritingDSCR

Debt Service Coverage Ratio (DSCR)

The primary investment-property underwriting ratio that measures whether a rental property’s cash flow is sufficient to cover its recurring mortgage debt obligations.

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Mortgages

Bridge Loan (Swing Financing)

A short-term interim loan secured by a homeowner’s existing property that unlocks trapped equity to fund the down payment on a new home before the current property sells.

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