Hard money loans aren’t as sketchy as you think

When Pratik Pathapati set out to buy his first fixer-upper in Sacramento, CA, for $400,000, he knew no traditional bank would touch the property due to its run-down condition. His only hope was a hard money loan.

Pathapati started showing up at local real estate meetups, where he connected with a private lender who was willing to hand him the $15,000 he needed for a down payment. The terms: 12% interest, due in full in one year.

“It was surprisingly easy,” Pathapati recalls, and he knew why: “The only thing hard money lenders care about is the house and if it’s a good deal.”

It was: Pathapati ended up selling the property for $500,000. Since then, hard money lenders have approached him with financing for future flips, hoping to earn his business. He now says, “hard money loans are the only loans I’ll ever get.”

The benefits of hard money loans

“Hard money” may sound sketchy, but it’s really just an IOU backed by a concrete asset—say, a house—rather than your paycheck and credit score. Demand for these funds has been rising among investors seeking fast, fuss-free loans for homes that traditional banks won’t touch. Other perks: less paperwork and closing in as little as a few weeks, compared to the 30- to 45-day timeline it takes for conventional mortgage lenders to come through.

A need for speed is why Tiffany DaSilva decided to get her first hard money loan to buy a foreclosure at auction. Not that she wasn’t nervous. “I’d heard these loans were ‘high risk’ and only for experienced investors,” she recalls. However, the loan application process with private lender Kiavi went smoothly, closing in three weeks on a $169,400 loan at a 10% rate. DaSilva flipped the house for a profit, paid off the loan, and was so satisfied with the experience, she says, “I’ll probably never do a traditional loan again. Hard money loans have a bad rap, but I think people shouldn’t be scared of them. They’re a tool that, if used right, helps you get the job done.”

But their bad reputation didn’t come out of nowhere. Interest rates are higher than conventional mortgages, and loan terms are shorter: typically one to three years rather than the usual 15 or 30. All in all, “a hard money loan can be an expensive way to borrow money,” warns John Egan, a personal finance expert for Experian. Hard money loans also lack many of the safeguards that come with traditional mortgages, which means it’s crucial to vet hard money lenders carefully.

Because entering an agreement to borrow money always involves a level of trust between two parties, it’s important to “build the relationships before you need them,” says Pathapati. “There’s no national database for this; it’s mostly word of mouth. Contact local hard money lenders, ask what they look for—down payment expectations, appraisal requirements, photos, whatever their process is—so that when your first deal comes along, you already know exactly who to call.”