What is a Hard Money Loan, and How Does it Work?

Not everyone can qualify for a traditional loan. Banks and credit unions look to verify a recipient via a background and credit check. Once this has been processed, they will then evaluate the loan request, recipient, and decide whether they are worthy. In other words, banks and credit unions look for someone trustworthy to lend their money to and this trustworthiness is mutually exclusive to creditworthiness.

Unfortunately, due to a host of reasons, bad credit or other circumstances can render someone unfit—in the eyes of these institutions—for a mortgage, loan, credit card, etc. Thus, they must look elsewhere.

On the flipside, there are investors, developers, and house-flippers that simply don’t like the traditional loan process. To them it is an arduous, complicated, and often-times rigged endeavor that leaves them owing a trust-fund worth of interest and with their credit maxed out.

Thus, what do these people do when they either can’t apply for a traditional loan or don’t want to?

Enter the hard money loan (HML).

What is a Hard Money Loan?

A hard money loan is (typically) a sum of money lent to an individual or business by a third-party investor(s). Rather than backing the loan via use of the recipient’s credit, the loan leans against physical assets. For example, rather than checking the individual’s credit score, the lender will grant the loan against the value of their home. Although real estate is the most common backing of hard money loans, other physical assets have been known to work as well.

When discussing borrowing hard money, it is important to note that they are typically issued to property developers While hard money loans certainly exist elsewhere, and are processed for a variety reasons, they are most commonly tied to real estate and flipping houses.

Some of the common types of HMLs go as follows:


This hard money loan allows a real estate developer to move on their green-lit project.

Bridge Loan

Bridge loans allow someone to snatch up a property quickly. These borrowers usually have the intention of selling or refinancing the home. Additionally, a bridge loan can allow someone to purchase a new property before they are able to cash out on their anchor home. In simpler words: a bridge loans allows the borrower to pay for a down payment although they do not have funds yet. This type of loan can also be issued to someone that does not qualify for a mortgage.


This type of hard money loan provides a borrower with the resources to purchase a property quickly, rehabilitate it, and then sell it. This sale will cover the cost of the property, loan, and provide additional profit.

Owner-Occupied Loan

Outside of the realm of real estate, this loan is tailored towards the borrower that does not qualify for a traditional loan. They will need to borrow against a physical asset, such as a property they own. Owner-occupied loans are almost always lent to homeowners.


Alternatively, private investors or firms will provide hard money loans on a case-by-case basis, which means the borrower may have the intention of using the money outside of real estate and may back the loan via different physical assets, such as a car.

How Does a Hard Money Loan Work?

Hard money loans have a bad reputation. We will delve further into this stigma later but generally, people think of HMLs as money handouts from the neighborhood mob that comes with, well, a serious price. If you fail to pay, they own you. Might even break your legs if you’re unlucky.

In the financial world, this notion is laughable. Hard money loans are simply an alternative method, one executed outside of traditional methods, that can provide investors, individuals, and real estate developers with capital.

The typical way a hard money loan works is as follows:


First, an individual or business will desire a hard money loan. This can be a result of their inability to obtain a traditional loan or simply their preference. They contact a hard money lender, explain their situation and amount coveted. The hard money lender will then evaluate their assets and investment opportunity and, if they deem the individual or business eligible, set a lending value based on the total value (always less) of the assets owned or to-be-purchased.

Fees & Interest

Upon settling on a price, the hard money lender will then apply fees and set an interest rate. As a rule of thumb, interest and fees will always be higher when it comes to a hard money loan. The risk does not come without reward—as we will explain later. Generally, the break down goes as follows:

  • 2-5% processing fee, often required upfront before the loan is issued
  • 12-21% annual interest

Say, for instance, you have been approved to take out a $100,000 hard money loan. In the best-case scenario of our above estimates, you will have to pay $2000 before receiving the loan and will accumulate $12,000 in interest per year. These numbers are relatively standard across the industry, but they do vary dependent on the value of assets, case, and lender.


Although hard money loans vary, the most typical must be paid within 6-12 months. These loans are processed quickly and their greatest advantage is their processing speed. At a cursory glance, the above processing fees and interest would not be worth it if not for how quickly these loans are issued.

Granted, not every borrower’s circumstance is the same, and hard money loans can range from 6 months to five years. Usually this is not the case.

Processing Time

A hard money loan can take anywhere from three days to a month to process. The average time, however, is one week. Therefore, borrowers who have come across an expiring but potentially lucrative real estate opportunity prefer hard money loans; while they may have higher fees and interest, dealing with less paperwork and downtime means they can seize the opportunity before them.

Hard Money Loans and Property Acquisition

While the aforementioned process is an oversimplification of the hard money loan, it does serve as a viable overview. Most hard money loans will follow those exact steps, regardless of the borrower or circumstance. But we should take a look at the most common reason for hard money loans; flipping properties.

How Do I Prepare?

If you are currently interested in obtaining a hard money loan in order to acquire a property, then you will need the following items before contacting them:

  • Address
  • The Purchase Price
  • Exit Strategy
  • Costs of Construction
  • ARV (After Repair Value)
  • Scope of Work

These are the base items you are going to need. If you stroll into a third-party lender’s office and say, ‘I want x loan because I want to buy a house’ they are nearly always going to want to vet the property you are referring to. You need to have the items handy—even if just for credibility purposes. They are going to take a borrower more seriously when they waltz in meaning business.

In addition to the above items, and to speed up the process, you will also want to include the below. Remember, this not a bank or financial institution; they are going to want to mitigate any risks by analyzing your investment history and other comparable properties.

  • A Breakdown of all Construction Costs
  • Property Feature Analysis
  • Comparable Properties That Support ARV (provide addresses)
  • ARV Breakdown
  • Potential Profit Margins
  • Evidence of Experience
  • Credit History Access

How the Lender Regards Your Flip-It Request

Take an Arizona hard money lender, for instance. They will estimate the size of a given loan dependent on a percentage of the property’s After Repair Value, an appraiser’s (usually independent) ARV, in-house ARV, a percentage of the given purchase price, percentage of the as-it-stands value, percentage of total coasts, or a combination of multiple of these eliminates.

With that being said and as we have stated before, each hard money lender is going to have a different process and this will vary both by the case in question and the third-party which lends the money. We can, however, make a few overt generalizations.

For residential flip-it requests, usually a hard money lender is going to size a loan to about 80%~ of the purchase price or 60-70%~ of the after repair value. In which case, here’s a breakdown:

ARV Breakdown

You are looking to buy a home that, for sake of an easy example, costs $100,000. The repairs and renovations are going to cost you around $50,000 and you expect to sell the home for around $200,000~ after all is said and done. If you had the money, then your profit would be somewhere in the realm of $50,000~ .

In which case you are probably going to see a hard money loan quote come in around $140,000~. This price is a combination of the above elements and, will still require some initial capital to sustain (by use of the example, you will need another $10k for the renovations and you will still have to pay for the loan fees and interest).

In addition to the total amount, some lenders may reserve a portion of the loan. This is commonly known as a ‘holdback’ and it is used for future advances. Often, it is given incrementally at certain milestones per se (like different stages of the home’s rehab) and can be used to pull equity out of the property before the sale is finalized. However, this holdback amount is not exempt from interest or fees. A hard money loan typically charges interest on the total amount issued (HML + holdback) from the date the funds are transferred.

How Can I Use a Hard Money Loan?

Saying that you can use a hard money loan in any which way isn’t necessarily true. While their applications can, theoretically, be endless, usually the way in which you are going to use the loan is dependent on the contract signed between you and the lender. For instance, if you are taking out a loan to buy a house as agreed upon by you and the lender, then blowing all the money on vacation will (most times) negate your contract.

With that being said, there are a few key reasons people take out hard money loans rather than traditional ones—even those that qualify for both.

The House-Flipper

Developers often prefer hard money loans because they can borrow larger amounts, back them with physical assets (which they own), and the processing time is much quicker. The reliability and efficiency of the hard money loan process is enough to justify the higher interest and fees. This is particularly true when an opportunity with a short expiration date surfaces.

The Non-qualifier

Those who own tangible assets but have bad credit may not be able to qualify for a traditional bank loan. They can spend all their time proving income, net-worth, and providing proof of their assets, but if they have bad credit (most times) the bank will not deem them eligible. Thus, they turn to a third-party lender looking for a hard money loan. The alternative process then grants them eligibility because the loan is backed by that which they own and their credit has no role in it.

The Distressed

This dynamic is often what gives hard money loans their infamous reputation—the financially distressed. At times, a borrower that has a loan in default they need to refinance will come to a hard money lender as a last-ditch effort to rectify the situation. Unscrupulous lenders can, in these instances, draft shady and ruthless hard money loan contracts that the distressed borrower is forced to sign—due solely to their own difficult circumstances.

However, in ethical and more common cases, if the borrower knows they are going to come into a sum of money but, due to current circumstances, cannot stay afloat, a hard money loan can be the perfect bridge to guide them over their troubles.

Quick Profits

The overarching theme of a hard money loan is this: the borrower has a way of generating substantial profits quickly and these profits, in their finality, will still hold their value even after fees and interest accrue on the HML. They do not have the money upfront to fund the quick-profit project themselves and, due to the difficult and time-consuming bank loan process, turn to hard money lenders instead.

What Are the Hard Money Loan Requirements?

You may find yourself reading through this article and thinking, ‘okay, I understand, but how do I qualify for a hard money loan?’ While HMLs are certainly more lenient in their eligibility-process that does not mean that everyone will pass muster.

The primary factor hard money lenders look at when issuing a loan is the total profitability of the deal in which a borrower is bringing to the table. Banks, on the other hand, focus on the property as collateral and the borrower’s creditworthiness. Thus, while a hard money loan will still vet the borrower (yes, this can include a credit check) the importance is not necessarily on them, but on the project. Remember, most HMLs are issued to developers looking to flip a home, meaning most hard money lenders are well-versed in real estate and have their own analytical teams that will consider a given project and say yes or no.

The reason in which we stress this point is because, well, there are no objective requirements ubiquitous across the third-party lending industry. Each potential project is going to have its own gamut of circumstances and these, for better or for worse, are what will constitute whether or not you meet a hard money lender’s requirements. The industry is so diverse that certain hard money lenders will approve a given project while others will not.

The rule of thumb is there are three types of projects (all involving real estate) that appeal to the hard money lender.

  • Fix and Flip
  • Cash-out and Refinance
  • Construction

Commercial Hard Money Loans

The process of obtaining a commercial hard money lending is typically no different than an individual. With that being said, having company backing for a larger project, commercial real estate being the focus here, can greatly benefit the validity of the borrower. Hard money lenders will have an easier time approving a given project if the company, especially if it is held in high esteem, is liable.

This greater liability paired with commercial projects will, after the aforementioned components are verified, result in a much larger loan than an individual.

Where Do I Get A Hard Money Loan?

You can receive a hard money loan form a third-party hard money lender. Being that borrowers are continuously put-off by the traditional banking system, there are now more hard money lenders than ever. Still, seeking a hard money lender in hopes of finding the one with the lowest interest and fees is not necessarily the route to the most trustworthy, dexterous, or even ethical lender.

How Do I Find a Good Hard Money Lender?

Unfortunately, anyone with lending capital can consider themselves a hard money lender. The check sizes can range anywhere from a few thousand dollars to the millions. Thus, when it comes to finding a good hard money lender, the people are arguably more important than the deal. The goal here is to find a trustworthy establishment that upholds great values, a fantastic reputation, and their standard of work.

As with anything in the financial world, due diligence is key. Make sure to do you research and ensure that the hard money lender you are considering has a good track record. While hard money loans are certainly stigmatized, that is not to say the world is without unscrupulous and shady lenders. Here are some important questions to ask when you are looking to find a good hard money lender.

  • Is the lender you are seeking an actual lender, or are they an extension of another?
  • What is the source of their capital?
  • How many loans have they processed in the last year?
  • Credit scores, are they important? (often, lenders that don’t so much as bother with credit can be indicative of shadiness)
  • How quickly do they process loans?
  • After your loan is funded, is it sold or do they keep it in-house?
  • Does the lender service the loan, or is it a third-party?
  • What kind of documentation is involved? Are they reliant upon third-party appraisers?
  • Is there an extension option on the loan in the case that your project goes on for longer than expected? If so, what sort of penalties or fees will accrue?
  • If a quote is provided, is that real to the terms? Or will they do an ‘overhaul’ before you sign?
  • The lender—are they well-versed in real estate? As in, do they flip homes themselves, or are they simply lenders?
  • Has the lender ever foreclosed on a loan?
  • Will they willingly provide references for borrowers they’ve worked with in the past?

These questions work as a fantastic starting point for at least peeling away the initial layers. The more answers you can obtain, the better your chances at understanding who your lender really is. Lastly, remember that these are not traditional institutions—meaning they are less regulated. The hard money loan business is typically relationship-based. Those that do well have long track records and varying clients. Those that want your money will promise the moon and eagerly await you to sign away.


A hard money loan can be a fantastic way to avoid traditional financial institutions and cash out on a quick loan—one that will help an investor seize an opportunity soon-to-expire. Despite their stigmatization, they are simply an alternate loan that comes with a different set of parameters. For developers, investors, and those who have the assets to support the loan but a bad credit score (often due to divorce), they can be a godsend.


Where to Find Best Hard Money Lenders?

Need help with cash? Try Source Capital, a trusted name in hard money lending. Started in 2006, Source Capital provides hard money loans on the basis of equity in property in the United States. The cash loans are secured without much nibbling into the borrowers past and it is extremely fast. Processing a loan within 7 days is our forte. Source Capital is your friend if you seek personal loans. The funding is done directly as we understand your needs in personal situations.


Source Capital provides direct hard money loans in California, Arizona, Oregon and Minnesota. We are a one stop solution for hard money loans. Hundreds of borrowers in Arizona, brokers in California and investors in Oregon and Minnesota have been able to generate funds and hard money loans from Source Capital. The licensed hard money lending process is extremely private and you are funding according to the real worth of your estate.

The presence of Source Capital in different states is a result of commitment towards its clientele. Source Capital is one of the highly reputed hard money lenders in Arizona, where so many quick hard money loans have been processed. More than $650M has been funded throughout Arizona and more loans are being processed every day. Many mortgage broker trust the brand for financing help. Get hard money loans funded in and around Arizona, Phoenix and even areas like Tempe, Peoria, Chandler, and Scottsdale etc.

Coming to the golden state, California hard money lending is quite useful. Source Capital is head quartered in San Diego and its direct money lending has helped so many borrowers. California hard money loans have been processed since 2006 by Source Capital and the clientele has grown significantly.

On a personal note, a partner of Source Capital comes from the land of 10,000 lakes. Many borrowers and real estate professionals secure hard money loans in Minnesota from Source Capital. The love for the state is quite clear as a record funding of more than $100M is already done in the state.

Need hard money lenders in Oregon, Source Capital is there too. Yes, the beaver state is also the real estate market that Source Capital has been financing. All around the state faster processing of loans is possible because real estate hard money loans are given by Source Capital.


Source Capital Direct Premier Hard Money Lender

Source Capital is a specialist in providing residential and commercial real estate hard money loans in the California and Arizona. We approach financing with private capital that allows speedy and flexible processing more than banks. You can secure loans by signing of deeds of trust on real estate. The management team has a legal counsel with decades of real estate experience, all of which helps people to rely on the experience and knowledge of Source Capital. In case of any assistance or query, please call us today at 888.334.6636.

Source Capital has a strong commitment to their clients, to business ethics, post-funding management and underwriting. Source Capital offers loans to various property types, both for residential (Single family, Multi-Family, Owner-Occupied) and commercial (Office, Retail, Industrial, Mixed-Use, Apartments) use.

Below is a list of Source Capital’s General Terms and Conditions:

  • Loan Amount is between $20,000 and $2,000,000
  • Interest Rate from 8.99% to 11.99%
  • For a period of 6 Months to 7 Years
  • Points: 2.5 – 4
  • Loan to Value: Up to 70%
  • Amortization: Interest Only
  • Collateral: Real Estate
  • No Prepayment Penalty
  • There are no upfront and junk fees

Source capital has standing work relationships with brokers, borrowers and investors and make sure that there is a secure transaction in a timely fashion. We have created a solid reputation for themselves by offering hard loans for real estate and are helping numerous borrowers, brokers and investors realize their business goals in a short period.

Source Capital is a direct and licensed lender, and hence borrowers can have the assurance that no loan paperwork will see the outside of the office. There is no need for external approvals or underwriting decision-making. With Source Capital’s immediate access to hard capital, there are fewer worries and snags.

Source Capital has its own funds, and hence, it specializes in private real estate funding for brokers fast and offers creative solutions to accommodate all client needs. We value our broker relationships and help close your transactions fairly and in time. After researching the property’s real worth, they approach funding in way so that they can structure the loans to fit the client’s finances.

Source Capital offers only first trust deed loans while giving the investors a great opportunity to get high yield returns, with minimum risk. The transaction is secured and offers the investors monthly returns. Each investor is recorded in a first trust deed position, with more security added in the form of a promissory note and personal guarantee. After funding is approved, the investors are given a loan-funding package consisting of documents involving all aspects of the loan. Source Capital tackles all due diligence process to take care of all the parameters and to manage the loan until term.

Source Capital protects the privacy of all its clients, and keeps all your information secure. As San Diego’s direct premier hard money lender, Source Capital boasts of firm business principles that have made their business relationships an overall success.

How to Get a Real Estate Loan With Bad Credit

There are many reasons for bad credit scores like financial problems or if you have recently started to build up your credit, whatever the reason, bad credit makes it difficult to acquire a loan from banks. But you can get the loan you want, even with bad credit, from good and trustworthy hard money lenders like Source Capital. We offer hard money loans for residential as well as commercial real estates. For more info, please contact us now via email or call us at 858.705.6144.


For a residential or commercial hard money loan, the underwriting decisions are mainly focused on the borrower’s hard assets, and not on his credit scores. In these cases, the real estate investment is used as collateral for the transaction. Hard money lenders are able to close the deals quickly, even in less than a week, as their funds mostly originate from private investors. Source Capital is a well known and well recognized residential and commercial hard money lender offering hard money loans in California, Arizona, Minnesota, San Diego, Phoenix, Los Angeles & more.

A commercial or residential hard money loan is a good alternative to traditional bank financing when you have bad credit. Hard money loans are beneficial to the borrower as well as the investor.

Source Capital lends hard money to people with bad credit, which can be a result of any number of circumstances. You can also apply for hard money loans from Source Capital when:

  • You have impaired credit and even with past bankruptcies
  • You have tax liens, judgments or unpaid items
  • For property repositioning
  • You need funds quickly to buy a residential or commercial property
  • You need a quick closing
  • To avoid foreclosure
  • You need a stated loan due to the presence or lack of tax returns
  • You need a “bridge” loan
  • You do not qualify for bank loans for some reason
  • You want to restructure you debt
  • You are a foreign national
  • You need a loan without the need to submit all your documents like in a bank
  • You need a personalized loan offering creative solutions for your financial situation

Source Capital will be able to secure and offer hard money loan in all these circumstance because bad credit does not matter much to us. Our decisions are almost solely based on the value of the real estate you are planning to buy. With Source Capital, you need not pay any upfront fees or prepayment penalties. Our terms and conditions are beneficial to both parties and can be customized to suit your finances.


How to Find Hard Money Lenders in California?

In order to find suitable hard money lenders in California, you need to identify your needs. The money lender should be reliable and trustworthy. All you need to do is follow a few simple steps to identify the best hard money lender to take care of your needs. Please call us now at 888.334.6636 to get more info about hard money lenders in California.


Each money lender has a set of different terms and conditions along with the requirements. It is a good idea to check up on the money lenders online and shortlist a few after some research for consultation. Meet with the firms and companies and discuss your requirements, their terms and options to know what they have on offer. Compare the suggestions and various topics discussed and answers given by different money lenders, so you can decide who will be more likely to give you what you want.

Ask your friends, relatives, neighbors and colleagues for suggestions regarding California hard money lenders. People who have applied for and used hard money will be in a better position to offer useful advice and to guide you with regards to the process and counsel you to take certain important precautions.

Online reviews and testimonials from clients offer great insights about any service. Use the internet to find more information about your shortlisted money lenders and then find out what people are saying about them. There are many review and testimonial sites where customers and clients voice their opinions. When you want to move forward to the next step to secure hard money loans and have a few companies in your mind, research them on Google. Read the reviews carefully and choose the ones you think that offer the best deal and services.

After doing your research and the data you have managed to compile, you will have a pretty good idea about which California money lender will be the best fit for you. Now take all your information and data and check with an attorney. Ask for opinions on the terms and conditions, negotiate if possible and needed, then sign an agreement. Your attorney should be able to help you guide through the agreement and terms, and check for issues prior to your acceptance of the deal. Sometimes the agreement may contain terms you are not familiar with; this is where your attorney steps in to clarify and check all the documentation before you sign any agreement.

A good hard money lender will work closely with you and walk you through the entire process. Make sure your property is worthwhile because it will the most important part of your transaction. No money lender will approve of a hard money loan if your property is not worth it. Good money lenders suggest solutions to problems, offer fair and flexible terms, reasonable repayment schedule and sometimes, give extensions.

Source Capital is the direct premier hard money lender in San Diego. We offer hard money loans for both residential and commercial properties. We finance through private capital and make sure that the process is fast. We work in tandem with our clients and ensure that the whole course is finished in as little as a week. Visit us for a consultation and we will help you in any way we can.