How Does a Hard Money Loan Work for Flipping?
Cash is king, but hard money is the engine of scaling. Learn how fix-and-flip financing works, from points and interest to the rehab draw process.
In the world of house flipping, speed is your greatest competitive advantage. If you find a distressed property listed at 60 cents on the dollar, you don't have time to wait 45 days for a traditional bank to verify your tax returns and inspect your shoe size.
That’s where **Hard Money** comes in. It is the bridge between finding a deal and securing the keys. While traditional banks lend based on *your* credit and income, hard money lenders lend based on the *property’s* potential.
However, hard money is an expensive tool. If you don't understand how it works—the points, the interest-only payments, and the draw schedules—your "easy flip" can quickly turn into a financial nightmare.
This guide will demystify hard money lending, explaining exactly how to use it as a weapon to scale your real estate business.
# Deep Dive Sections
- What Exactly is Hard Money?
- LTC vs. LTV: Know Your Ratios
- Understanding Points & Interest
- The Rehab Draw Process Explained
- Step-by-Step Approval Guide
- Is Hard Money Right for You?
What is a Hard Money Loan?
A **Hard Money Loan** is a short-term, asset-based loan secured by real estate. Unlike traditional mortgages, hard money loans are typically funded by private companies or individuals, not institutional banks.
Funding can happen in as little as 5-10 days.
Approval depends on property value, not just credit score.
Usually 6-24 months. Designed for flipping, not holding.
The Ratios: LTC vs. LTV
Hard money lenders use two primary metrics to determine how much money they will give you. Understanding these is vital for calculating your "cash-to-close."
LTC (Loan to Cost)
This is the percentage of the *total project cost* the lender will fund. If a lender offers **90% LTC**, and your purchase price + rehab is $200k, they lend $180k. You bring $20k to the table.
LTV (Loan to Value)
This is based on the **ARV (After Repair Value)**. Most flipper lenders cap their total loan at **70-75% of ARV**. This is their "safety margin." If the market crashes 10%, they are still safe.
Calculate Your Hard Money Costs
Use our Fix & Flip Calculator to factor in points, interest, and holding costs automatically.
Understanding the Costs: Points & Interest
Hard money is not cheap. You are paying for speed and flexibility. Here is the typical cost breakdown:
Points (Origination Fees)
One point equals 1% of the loan amount. Most lenders charge **1 to 3 points** upfront. On a $200,000 loan, 2 points equals a $4,000 fee paid at closing.
Interest Rates
Hard money rates typically range from **10% to 14%**. Most of these loans are **interest-only**, meaning your monthly payment only covers the interest, and you pay back the principal (the full loan amount) when you sell the house.
The Rehab Draw Process
This is where most beginners get into trouble.
Lenders do not give you the rehab money in a lump sum at closing. Instead, they hold it in "Escrow." You must complete a portion of the work using your own cash (or contractor credit), and then request a "Draw."
How a Draw Works:
You install the roof and new windows.
You submit a Draw Request to the lender.
The lender sends an inspector to verify the work (~$150 fee).
Lender releases the specific funds for those items.
**Pro Tip:** Always keep $10k-$15k in "Float" capital. You need it to start the work before the first draw comes in.
Step-by-Step Approval Playbook
Submit the Deal
Provide the address, purchase price, and your estimated rehab budget. Most lenders also want to see 3 solid 'Comps' (comparable sales).
Entity Setup
Hard money is a 'Commercial Loan.' Most lenders require you to close in an LLC or Corporation, not your personal name.
The Appraisal
The lender orders an 'As-Is' and 'Subject-To' appraisal. This confirms the current value and the After Repair Value (ARV).
Credit & Background
They will check your credit. You don't need an 800 score, but most lenders look for 620-660+ to ensure you aren't a flight risk.
Closing
At the title company, you sign the note and deed of trust. You bring your down payment, and the lender wires the purchase funds.
The Power of Leverage
If you have $100,000 cash, you can buy ONE $100k house. If you make $30k profit, your ROI is **30%**.
If you use that same $100,000 as down payments for **FOUR** $100k houses using hard money, and make $30k profit on each, your total profit is $120k. Even after paying $20k in interest, you have $100k net profit.
Your ROI just jumped from 30% to 100%. That is why flippers use hard money.
Conclusion
Hard money is a high-octane fuel for your flipping business. It allows you to compete with cash buyers and scale your operations without exhausting your own bank account.
The secret to success is not finding the "cheapest" money, but the most "reliable" money. A lender who closes on time every time is worth an extra point in fees.
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