FAQs: For Borrowers and Brokers

Hard money is a direct, short-term loan that is secured by the value of the property being purchased or other real estate assets. Because the loan is backed by equity, hard money lenders are less focused on the borrower’s creditworthiness and more focused on the potential for a successful project. 

A hard money lender provides equity-backed loans for a range of purposes. The lender could be an individual, investor group, or private lending company like Socotra Capital.

A hard money loan is an equity-based loan used as a bridge to fund the borrower’s immediate financial needs. Generally, it is a short-term solution (six months to two years) for clients who need fast money or wouldn't otherwise qualify for a conventional loan due to borrower, property, or timing issues.  Most hard money loans are used for projects lasting from a few months to a few years. The funds are used for all types of real-estate secured financing, including commercial, retail, industrial, raw land, construction, rehab, single-family homes, and multi-family homes. You can also get a hard money commercial bridge loan to cover payroll, purchase inventory, buy out a partner, or fill other types of financial gaps.

Traditional bank loans are dependent on many factors, including the borrower’s income, credit, and net worth. They require minimum credit scores and can take months to close.

A hard money loan relies on real estate equity. There are no credit score requirements, and loan decisions happen quickly. Although higher risk means a higher interest rate, hard money loans can be beneficial and are often the only way to take advantage of investment opportunities.

Bridge loans are temporary loans, often used by business owners to fill gaps or by investors to purchase, build, or fix and flip a home or commercial property. These loans can give small businesses short-term capital to work during the time it takes to renovate a property, find tenants, establish a business, or sell the renovated property. Commercial bridge loans can also be used to improve a property, purchase equipment, buy inventory to fill a large order, and cover payroll until invoices get paid. Hard money bridge loans sidestep the restrictions that conventional lenders are bound to, making it much easier for investors to secure funds, and the quick approval process is vital to keep up with the fast pace of the market.

Hard money lenders can provide funds for commercial and residential rental properties, fix-and-flips, cannabis facilities, and much more. Hard money lenders do not provide traditional mortgages for owner-occupied homes. 

Hard money loans are backed by equity, with less emphasis on the borrower’s credit or income history. This means that if you have non-traditional income streams or a poor credit history, you may still be able to get a hard money loan. Hard money lenders also move fast, sometimes closing in as quickly as five days. For real estate investors, this speed provides a competitive edge that you won’t find at a traditional bank.

Hard money loans come with higher interest rates, but for many borrowers, the ability to move quickly and get funding for projects that traditional banks won’t fund is worth the investment.  

Borrowers choose hard money loans for a variety of reasons, but the top two tend to be speed and flexibility.

Hard money serves as an alternative to traditional lending. Borrowers using hard money may not qualify for bank financing, whether it be due to borrower, property, or timing issues. Borrowers with challenged credit, unseasoned funds, or incomplete loan files can still qualify for hard money. The condition and occupancy ratio of a property are less relevant to a hard money lender compared to conventional lenders.

Conventional loans require a lengthy approval process, strict adherence to approval criteria, and significant down payments that leave the investor strapped for cash once they have acquired the property and renovations begin. Hard money loans were developed to fill this gap in the lending market.

The main difference between a bank and a hard money lender is the level of flexibility that each allows. Traditional banks are subject to strict regulations, and their lending criteria may not allow certain types of loans. Borrowers must also meet minimum criteria based on credit history, income, and other factors. Hard money lenders are also regulated to protect borrowers, but they can be much more flexible. In some cases, even if you can’t get a traditional bank loan, a hard money lender will work with you to fund your real estate project by providing a commercial bridge loan, a private line of credit, and more. Hard money lenders are also able to move much more quickly than traditional banks, so even if you are eligible for a bank loan, a hard money lender might be preferable.  

A good lender is willing to instigate development and build positive relationships with real estate developers. Often, developers work with the same lender over the years on residential rehab projects, developing a trusting, mutually beneficial working relationship. However, before committing to a lender, it’s vital to make sure you’re working with a competent lender, as well as to consider whether or not hard money is the right option for your development.

In the case of Socotra Capital, accredited investors contribute to a fund that is essentially used as a loan pool. Borrowers submit their projects for loan approval, and investors benefit from the interest on the loans.

In a word, yes. A hard money loan is just as right for a new investor in residential or commercial real estate as it is for an old hand. It’s the ideal option for anyone who has a promising investment lined up and needs a short-term loan. Several common loan types include.

Hard money lenders have the freedom to set their own criteria for loan approval. Banks are under stricter regulatory constraints and have to follow Federal Housing Administration (FHA) guidelines. Because many distressed properties do not meet FHA guidelines, it can be virtually impossible for residential rehab developers to acquire a traditional bank loan written through Fannie Mae or Freddy Mac.

You can find hard money lenders across the country, but they do not all provide the same level of reliability and service. Look for a licensed lender with a long and strong track record. It’s also a good idea to explore the deals funded by a potential lender to see how well they align with your expectations.

The first step is to submit an application. Socotra Capital makes it easy with our short form to kick off the process. We’ll gather all the information we need, coordinate with our underwriters, and quickly make an approval decision so you can keep your project moving. 

Hard money loan terms vary depending on the lender, but they are typically intended to be short-term loans in the range of six months to two years.

Yes. Because a first and second trust deed are in different risk positions, it depends on the size of the first, the lender in the first position, and the intended use of the funds.

When a borrower doesn’t pay off a hard money loan, the lender can foreclose on the asset that was used to back the loan. This helps protect investors because it allows some recourse for recouping the funds.

Hard money lenders are regulated at the state level, which is why they need to hold a license in each state in which they operate. These regulations help protect borrowers, but also allow hard money lenders more flexibility than the federal regulations that banks are subject to. 

Closing a hard money loan can happen as quickly as five days, but a more common timeline is about ten days.

Hard money lenders typically bear more risk than traditional lenders. However, the comparably higher level of flexibility may be worth the extra cost.

Just as with any service provider, there is a broad spectrum of hard money lenders. Some are new on the scene, while others have been established for decades. Some focus only on a specific local area, while others may be licensed in multiple states. Of course, they all have different approval processes, interest rates, terms, and willingness to be flexible. The key to finding the right fit is talking to multiple lenders to assess their experience level, loan offerings, and willingness to work with you.

A hard money lender may provide a letter of interest (LOI) or proof of funds after the loan application has been approved.

Yes. Hard money lenders are typically able to be flexible in terms of the equity backing the loan. In fact, many are also willing to lend to foreign investors.

In many cases, yes. Because the loan is backed by equity, credit history is a less important factor in the application process.

Most of the time, there are no prepayment penalties, but some hard money lenders may include a prepayment penalty if it helps to get better terms.

For fix-and-flip loans and ground-up construction projects, the after-repair value (ARV) is crucial. It represents the estimated market value of the property after all planned improvements are completed. Our loan amounts are often based on a percentage of the ARV, ensuring sufficient capital for the project. Similarly, the loan-to-cost (LTC) ratio is essential, as it evaluates the loan amount against the total cost of acquiring and renovating or building the property. We use these metrics to provide optimal financing solutions for your value-add real estate projects.

Yes, we offer debt service coverage ratio (DSCR) loans for investors acquiring or refinancing income-producing properties, particularly single-family rentals (SFR) and multi-family homes. These loans primarily assess the property's ability to generate sufficient income to cover its debt. Our origination fees (often referred to as "points") and other closing costs are clearly outlined upfront, ensuring transparency throughout the expedited financing process. We aim for a streamlined approval process to get you funded quickly.

Absolutely. Unlike traditional lenders, Socotra Capital specializes in asset-based lending. Our underwriting primarily focuses on the equity in the real estate, not solely on your credit score. This means we can provide flexible hard money solutions for borrowers with low credit scores, those who have experienced prior bankruptcies or foreclosures, and even foreign nationals with limited or no U.S. credit history. Your property's investment potential is our main consideration.  

Our bridge financing (or interim financing) is designed as a short-term solution, typically with a loan term ranging from six months to two years, ideal for quickly acquiring properties or bridging a gap between transactions. We strive to be flexible with our loan structures, and any potential prepayment penalties will be clearly communicated in your loan agreement. Our goal is to provide pragmatic solutions that allow you to exit the loan when your project reaches completion or a permanent financing solution is secured.

Yes, we actively finance distressed properties, including foreclosures and real-estate owned (REO) assets. These types of properties often require quick closing and specialized financing, which is precisely where our Turbo Close® hard money loans excel. Our focus on the underlying collateral allows us to provide rapid funding for investors looking to acquire and capitalize on these opportunities.

The lender’s interest rate for a hard money loan is likely to be between 8-18 percent of the loan’s value. For a conventional 30-year fixed-rate mortgage, a borrower in today’s market is looking at an interest rate of around 4.125 percent.

However, a 30-year mortgage is not really comparable to a hard money loan, and the two types of loans offer different advantages to the borrower. The hard money loan offers many pragmatic advantages for investors who need quick approval to finance a residential rehab or fix-and-flip development, or to begin ground-up construction.

Like any conventional lender, hard money lenders do charge a loan fee prior to funding. This fee is measured in “points”—one point is equivalent to 1 percent of the loan value. The number of points could depend on the complexity of your loan and the agreement you reach with your lender.

Hard money lenders will generally take a much more comprehensive approach to evaluating potential loans than a conventional lender. Because hard money lenders have greater freedom from regulation and federal mortgage rates, they rely more heavily on the actual investment potential of the property and the borrower’s experience with real estate development.

This is determined on a case-by-case basis. Most borrowers should expect to take an initial loan to establish a working relationship.

Yes, as long as it is not owner-occupied.

One can never forecast with absolute accuracy the Fed’s next strategic move with our fiscal policy, but you can be prepared to respond to the shifting supply and demand of private capital. Expand your options for funding with hard money.