A hard money loan may be tempting if you need a quick home loan, but it comes with significant risks.
These short-term loans have high interest rates and are commonly used by real estate investors and house flippers who need fast access to capital. They also attract borrowers with poor credit or unstable work history who can't qualify for traditional loans.
However, using a hard money loan for a primary residence is risky because failure to repay the loan in a few years or to secure refinancing could result in losing your home.
Here's the good news: if you want to buy a home but aren't sure if you have the credit or down payment to qualify for a traditional mortgage, many mortgage programs have lower credit or down payment options. See your alternatives here.
Can I get a hard money loan for a primary residence?
Technically, you can use a hard money loan to purchase your home. However, it's a far less common means of financing than traditional methods.
Hard money loans have high interest rates, typically 10-15% or more, and fees can be as high as five or six points (points are upfront fees paid to the lender, each equating to 1% of the loan amount.)
Another significant factor is the loan-to-value (LTV) ratio, or how much of a property’s appraised value the mortgage will cover. The LTV is often less than 80% of the property value for a hard money loan, requiring a substantial down payment.[1]
These loans are usually secured through private lenders specializing in real estate, with the property itself as collateral, posing a risk if repayment terms aren't met.
The biggest advantage to hard money loans is that approval tends to be quick and easy. There are no extensive background checks; the lender only wants to ensure you have a history of making payments on time. This means you could be approved in as little as two days.[1]
Types of hard money loans
There are several types of hard money loans residential buyers can use, including:
- Bridge loans: The term is six to 24 months and ends in a balloon payment. These loans can close in a day but take a week or two.
- Cross-collateral blanket loans: Also known as multi-property loans, these consist of one loan secured by two or more properties.
- Fix and flip financing: For those who plan to renovate and resell, this loan often provides up to 80% LTV on the purchase and up to 100% of the renovation financing.
- Owner-occupied: While available for those with poor credit, these often go to qualified buyers with excellent credit, income, and reserves; a 30% down payment; and a clear strategy for paying off the loan.
- Second and third mortgages: These loans have a higher interest rate, last one to three years, require higher upfront costs, and offer 60–65% LTV.
Pros and cons
The right loan for you depends on your unique situation, and hard money loans have some pretty clear pros and cons.
Pros
- Approval in days
- Often no credit check required
- Work with a private lender
- Receive cash in days
Cons
- High interest rates
- Short payback period
- High loan fees
- High down payments
- Won’t cover total purchase price
- Could lose property if terms aren’t met
While the quick approval and minimal background checks make hard money loans appealing, especially for those who don't qualify for traditional loans, they come with high costs and significant risks.
We can’t emphasize this enough: if you can't meet the repayment terms or secure financing from another source to cover the loan, you risk losing your home.[2] This is a significant risk that could have damaging long-term consequences.
Qualifying for hard money loans
While a hard money loan is relatively easy to get, there are certain requirements that you must meet. These include:
- A minimum credit score, which varies by lender
- A low debt-to-income (DTI) ratio
- The ability to make a down payment of at least 20% of the loan amount
You’ll also be required to submit income statements and show the equity you have in your current home (if applicable). The lender will consider the property’s LTV and its appraised value. After all, the lender wants to ensure they're making a sound investment should you fail to meet the repayment terms and have to forfeit the home.
Both single- and multi-family residential properties often qualify for a hard money loan. However, lenders tend to focus on real estate investors as they are more likely to repay the loan through the mortgage or profits from a fix-and-flip sale.
Hard money loan alternatives
| Loan type | Down payment | Minimum credit score |
|---|---|---|
| FHA loan | 3.5% | 580 |
| HomeReady loan | 3% | 620 |
| Home Possible loan | 3% | 660 |
| VA loan | 0% | 620* |
| Conventional | 3-20% | 620 |
Hard money loans come with high interest rates and short terms, making them risky for many residential buyers. In contrast, conventional mortgage loans offer lower rates and longer terms, allowing for more manageable payments. However, traditional loans often require a higher credit score.
Fortunately, there are other options available.
- Government-backed loans, such as FHA loans and VA loans, have low interest rates and are designed to help low-income buyers and those with poor credit purchase a home.
- VA loans, in particular, typically offer the lowest average interest rate and a 0% down payment.
- Fannie Mae and Freddie Mac also offer loan programs for low-income buyers: the HomeReady Mortgage and the Home Possible Loan.
Government-backed mortgages are generally easier to qualify for. You must meet the credit, income, and financial requirements set by the lender and the government agency backing the loan.
Hard money loans for primary residence: The bottom line
Hard money loans may appear attractive for those with limited financing options. However, before you proceed, it's essential to understand the risks and costs involved.
Specifically, you face a shorter term and significantly higher interest rates. The loan amount will never cover the total purchase price, so you’ll need a substantial down payment. Because your property is the collateral for the loan, you risk losing your home if you can’t make the payments.
Talk with a financial advisor or real estate professional before you seek a hard money loan or one of the alternatives. They can offer advice for your specific situation so you can make a wise investment.
Clever Real Estate can connect you with top local agents who provide expert guidance and savings on your home purchase. Find a trusted agent in your area and make informed decisions about your home investment with Clever.
