What is the Difference Between Banks and Hard Money?

When you’re starting out as a fix and flip investor, you’ll need to decide how to finance your projects. Two of the most obvious options are hard money loans and bank loans. However, before you decide which one is right for you, it’s best to know how they differ. Here’s what you need to know.

Loan sum:

The total sum you can borrow with a hard money loan is based on the value of the property you’re rehabbing. An after repair value (ARV) loan is typically between 65 and 70 percent of the projected selling price, and a loan to cost (LTC) loan is usually 75 to 80 percent of the amount you’ll need to purchase and rehab the property. A loan from a bank usually only covers 70 percent of an investment property’s asking price. In some cases, investors with a proven track record can get additional funding to cover renovations.

Loan term:

A hard money loan is as a short-term loan of (usually) maximum 12 months. A bank loan can be structured for a much longer term—10 years, 15 years, or even longer.

Interest rates:

Interest rates on hard loans are high, typically between 14 and 18 percent. Interest on a bank loan is the same as the going mortgage rate, which is usually between four and five percent.

Loan requirements:

To qualify for a hard money loan, you’ll need a well-researched business plan that substantiates the requested loan amount. You’ll also need the cash balance of the total costs that isn’t covered by the loan amount. The property itself usually functions as the collateral. A bank requires you to have enough cash to cover both your regular mortgage payments and the loan payments for the investment property for at least six months. In addition, you’ll need to make a down payment of 30 percent.

Loan eligibility:

The eligibility requirement for a hard money loan is typically a sound business plan. Note that the lender will do its own research to corroborate that fact. In some cases, hard money lenders require inexperienced investors to have a credit score of at least 620, as well as additional collateral, such as your home or another valuable asset. A bank loan will consider your credit history, current credit score, and employment plus income information. A bank will not consider projected income from your investment property when evaluating your eligibility for the initial loan.

Property limits:

Hard money loans don’t cap the number of properties you can finance, which means that investors can build their portfolios by working on a large number of properties simultaneously. Banks aren’t permitted to finance more than 10 properties per lender.

Speed to obtain a decision:

Hard money loans are evaluated quickly, so investors typically get a decision within days. Banks can take as long as three months to evaluate a loan application.


Now you know the difference between hard money and bank loans, you’ll be better equipped to choose the financing option that’s right for you. Just remember: If something isn’t clear in the description of any loan, ask plenty of questions to be sure the agreement lives up to your expectations.