How Real Estate Hard Money Loans Work

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Many investors see the advantages of investing in real estate. With adequate resources, property purchases can help the savvy investor diversify their portfolio and build wealth. While there are resources, like crowdfunding networks, to help you establish investments passively, most will still require a substantial amount of cash, especially for investors who want to own property directly.

 If you want to reduce your initial up-front expenses, then consider a residential bridge loan through hard money lenders San Francisco. Before applying for a hard money loan, however, it is necessary to understand the process and the pros and cons of such a financing solution to know if it is right for you.

Overview of Hard Money Loans

As short-term lending instruments, hard money loans California are excellent options for real estate investors. House flippers use these loan programs to invest in short held properties for renovations and resale. Unlike conventional loans, you secure hard money loans, like bridge loans, through private lenders and not typical financial institutions, like banks.

There is a benefit to looking for funding outside of traditional institutions: creditworthiness is a secondary factor. Hard money lenders are more interested in the investment’s ARV or after repair value. As the lender owns the short-term mortgage, risks stay tied to the property worth and not the borrower’s credit. However, credit will probably still play a role in final decisions because it speaks to the reliability of the borrower.


There are at least three reasons to favor a hard money loan over a conventional mortgage: convenience, flexibility and collateral. The Dodd-Frank Act resulted in robust regulations in the mortgage industry, which means applying for a traditional loan is time-consuming and trying. For real estate investors, taking months to resolve a loan application is not efficient. Most investors need to make quick decisions and close on deals in a matter of days, not months. Hard money loans make fast negotiations possible with full funding possible in a matter of weeks.

As banks must adhere to federal regulations, there is little room for negotiation in the loan process, meaning investors must stick with pre-established payment structures, loan terms and fees. Hard money lenders are private entities, free of the regulatory restrictions of the government, which means investors can bargain for a better deal, often reducing or eliminating unnecessary fees in the underwriting process.

Most financial institutions require collateral for a substantial loan. Hard money lenders operate differently because the property of interest acts as the collateral for the loan. While many lenders prefer to work with the property as the guarantee, as hard money is a private endeavor, some lenders may allow you to secure the loan with personal assets instead.


There are two primary cons to hard money agreements: time constraint and cost. The design of the hard money or bridge loan creates an opportunity for the quick transfer and sale of the investment property. Unfortunately, the quickness of the exchange means the restriction of repayment terms. Also, while these loans are convenient, lenders only enjoy the exchange with higher interest rates, sometimes as much as ten percentage points higher than conventional programs.

Hard money loans are not right for everyone. If you want to discuss more pros and cons or your situation, then contact a hard money lender in your area.