Key takeaways
- Hard money is underwritten mainly on the property, the plan and the exit, not your personal income.
- The loan is usually the lower of a loan-to-cost limit and a loan-to-ARV limit.
- Renovation funds are released in draws after work is completed and verified.
- Payments are interest-only; the loan is repaid from a sale or a refinance.
- Time is a cost. Every month the loan is open adds interest and holding costs.
The life of a hard money loan, start to finish
Most investor loans for renovation projects follow the same path. Understanding it before you make an offer tells you how much cash you need and where time goes.
1. You find a deal and submit it
You have a property under contract or in negotiation. You share the address, purchase price, renovation budget, expected after-repair value (ARV), timeline and your experience with a lender. A good first conversation tells you roughly how the loan could be sized and what the lender will need.
2. The lender sizes the loan
The lender runs two tests and uses the lower result:
- Cost test (loan-to-cost): a percentage of the purchase price plus a percentage of the renovation budget.
- Value test (loan-to-ARV): a percentage of what the property should be worth after renovation.
Your experience, the property type and the location all influence the percentages. What is LTC? explains the tests in detail, and the loan calculator runs them on your numbers.
3. Underwriting and valuation
The lender reviews the property's value, often through an appraisal or desktop valuation, along with your scope of work, your liquidity, your credit and your entity documents. Title is ordered and insurance is arranged. Because the focus is the asset, this typically moves faster than a bank mortgage.
4. Closing: the initial advance
At closing, the lender funds its share of the purchase price. You bring the rest of the purchase price, closing costs and the points (the origination fee). The renovation budget is set aside as a holdback.
5. Renovation and draws
Your contractor completes a phase of work. You submit a draw request, the work is verified (at Wisdom Capital, by photos or video, with a same-day wire), and the lender releases the funds for that phase. Draws reimburse completed work, so you need cash to start each phase.
6. Interest-only payments
Each month you pay interest. Many lenders charge interest only on the money actually disbursed, so interest grows as draws are released. Confirm the method on your term sheet.
7. The exit
When the renovation is finished, you either sell the property and repay the loan from the proceeds, or refinance into long-term financing if you plan to rent it out. Many long-term rental loans are DSCR loans; see hard money vs DSCR.
A worked example
Hypothetical flip
Illustration only| Purchase price | $400,000 |
| Renovation budget | $100,000 |
| After-repair value | $700,000 |
| Loan: 90% of purchase + 100% of renovation | $460,000 |
| Advance at closing (90% of purchase) | $360,000 |
| Renovation holdback | $100,000 |
| Buyer's share of purchase price | $40,000 |
Uses Wisdom Capital's published guidelines for qualified investors (up to 90% of purchase, up to 100% of hard costs, capped at 70% of ARV; here the loan is 65.7% of ARV). Points, closing costs and reserves are additional. Subject to underwriting and final approval.
What it costs
The cost of a hard money loan has three parts:
- Interest, paid monthly, for as long as the loan is outstanding.
- Points, an upfront fee as a percentage of the loan.
- Third-party costs: valuation, title, legal, recording, and in some states mortgage or transfer taxes.
Because the loan is short, the number of months matters as much as the rate. A project that runs three months long can cost more than a slightly higher rate would have. Budget time conservatively.
When hard money makes sense
- The property needs work that a conventional lender will not finance.
- You need to close faster than a bank can.
- You plan to sell or refinance within months, not years.
If you are buying a rent-ready property to hold for years, a long-term rental loan is usually the better fit.
Questions about how hard money works
Is a hard money loan hard to get?
The name refers to the "hard" asset securing the loan, not the difficulty. Approval depends mostly on the property, the plan and your liquidity.
Can hard money pay for the renovation too?
Yes. Renovation funds are typically included as a holdback and released in draws. See acquisition + rehab loans.
What happens if my project takes longer than the term?
Many lenders offer extensions, usually for a fee. Discuss extension terms before closing and build extra time into your plan.
