A hard money loan is short-term financing secured by real estate and sized primarily against the collateral rather than the borrower's personal income. This article covers hard money loans used for a business or commercial purpose. The cost is not a single rate. Interest, upfront charges, valuation and title work, draw mechanics, extension provisions, and payoff-side items each attach at a different stage. Reading them together is what produces the real number.
A quoted rate describes one line in a structure that has many. Two loans quoted at the same rate can produce different totals once upfront charges, third-party costs, draw procedures, and payoff provisions meet an actual timeline. This article walks the lifecycle in order, from term sheet to payoff wire, and classifies each cost as structural, lender-dependent, product-dependent, or state-dependent.
What a Hard Money Loan Is, and What It Is Not
A hard money loan is asset-based financing for investment real estate, written for a short term. A central question is what the collateral supports. Credit, liquidity, and project experience still matter and can move terms, but they sit alongside the property rather than replacing it. Loan sizing is expressed through ratios such as loan to value, and on renovation files through a completed-value ratio such as loan to after-repair value.
The label travels under several names. A bridge loan describes the function, which is to carry a property from one financing state to another. Private money describes the funding source. Hard money describes the collateral-led posture. The terms overlap, and two lenders can use the same word for programs with different draw procedures, fee schedules, and payoff provisions. The name does not establish the mechanics underneath it.
This article covers hard money loans used for a business or commercial purpose. Regulation Z contains an exemption at 12 CFR 1026.3(a)(1) for an extension of credit primarily for a business, commercial, or agricultural purpose, and the Consumer Financial Protection Bureau publishes the exempt-transaction provision. That exemption is not automatic and does not attach to a loan because it is called hard money. Whether it applies depends on the primary purpose of the particular extension of credit and on the facts of the transaction, which is why stated use, occupancy, and vesting appear so early in the file.
It is not one product. The same lender may write a purchase bridge, a renovation loan with a holdback, and a ground-up construction facility. The cost lines below can appear in any of them; what changes is which apply and which are large.
Where This Structure May Fit, and Where It May Not
Four recurring business-purpose use cases show how the cost structure can change from one file to another. Each has conditions under which a short-term loan is the wrong tool rather than an expensive one.
Fix and flip. A property is purchased, renovated, and resold. Renovation funds may be held back and released through draws rather than advanced at closing. Where funds are held back, check whether draw-related charges apply and how draw timing affects the hold. Loan sizing turns on cost and completed-value ceilings, which the fix and flip loan guide works through and the Fix and Flip Calculator models.
Bridge. A property is acquired or held while something is resolved: a lease-up, a partner buyout, a title cure, an entitlement. Where there are no renovation draws, upfront charges and interest may carry more of the cost, making the holding period especially important to model.
Bridge to DSCR. A short-term loan carries a property to stabilization, then a longer-term rental loan takes it out. This is two transactions, and the second has its own underwriting, closing costs, and timeline. The DSCR loan guide covers that structure, the debt service coverage ratio entry defines the measure, and the DSCR Calculator models it. The cost risk here is the gap between the short-term maturity and the date the takeout is actually ready.
Construction. Ground-up or substantial vertical work. Construction financing can involve an extended draw schedule, repeated inspections, and charges tied to an undrawn commitment. Cost attaches across more stages than in a bridge with no draws.
| Use case | When the structure may fit | When it may not fit | Primary cost or timeline item to verify |
|---|---|---|---|
| Fix and flip | Scope is defined, budget is documented, and the resale exit is realistic on the stated timeline | Scope is unsettled, the budget is an estimate, or the exit depends on a market move | Draw procedure, turnaround from request to funding, and cash needed between payments and reimbursement |
| Bridge | A specific, dated event resolves the situation and a defined takeout follows | The resolving event has no date, or no takeout has been identified | Interest exposure across a realistic hold, and whether extension is available |
| Bridge to DSCR | Stabilization is achievable inside the term and the takeout requirements are known in advance | Stabilization timing is uncertain, or the takeout has not been tested against the property's actual numbers | Maturity date against realistic stabilization, plus the full cost of the second closing |
| Construction | Plans, permits, and budget are complete, and the draw schedule matches the build sequence | Permits are outstanding, the budget is provisional, or the schedule has no contingency | Inspection cadence, any charge on the undrawn commitment, and extension terms |
None of this is an eligibility statement. Whether a transaction can be financed, and on what terms, is decided by the lender's credit policy applied to the complete file.
The Loan-Lifecycle Cost Stack
Costs attach at three moments: at closing, during the hold, and at payoff. Not every line applies to every loan, and timing determines which are fixed at the outset and which depend on later events.
Each cost also belongs to a category that tells you where to look for the answer.
Structural is this article's editorial classification for costs that arise from how this kind of financing is built rather than from a particular lender, product, or state. It groups cost mechanics; it does not measure how often a charge appears.
Lender-dependent costs are set by the individual lender's program and fee schedule.
Product-dependent costs follow from the loan structure chosen. A renovation holdback, a construction facility, and a simple bridge do not carry the same lines.
State-dependent costs are shaped by the jurisdiction where the property sits and where the transaction records.
Many charges carry more than one dependency. The table gives the primary classification and names what else moves it.
| Cost line | Lifecycle stage | Primary classification | Calculation basis | What can change it |
|---|---|---|---|---|
| Upfront percentage charge, or points | Closing | Lender-dependent | Percentage of loan amount | Program, loan size, what it pays for |
| Appraisal or other valuation | Closing | Structural | Appraisal cost, including updates | Property type, re-inspection |
| Title and escrow | Closing | State-dependent | Premium plus service fees | State practice, policy type, who pays |
| Survey | Closing | State-dependent | Cost of the survey | County practice, lender requirement |
| Recording and transfer charges | Closing | State-dependent | Recording fees and transfer taxes | Jurisdiction |
| Legal and document preparation | Closing | Lender-dependent | Reimbursement of lender expense | Entity structure, document set |
| Note interest | During hold | Structural | Rate applied to a stated balance | Rate, time held, committed versus disbursed balance |
| Minimum interest provision | During hold or payoff | Lender-dependent | Stated minimum period | Note terms, payoff date |
| Draw inspection and administration | During hold | Product-dependent | Per inspection | Draw count, inspection cadence |
| Charge on the undrawn commitment | During hold | Product-dependent | Rate on the unused portion | Whether the facility carries one; utilization |
| Servicing | During hold | Lender-dependent | Built into the rate or billed separately | Servicer and program |
| Extension | As extension terms specify | Lender-dependent | Per the fee schedule | Availability, lender consent, valuation |
| Default rate and late charges | On late payment or other default | Lender-dependent | As stated in the note | Note terms and applicable law |
| Exit fee | Payoff | Lender-dependent | Percentage stated in the fee schedule | Program, term sheet |
| Prepayment provision | Payoff | Lender-dependent | As stated in the note | Existence, payoff timing |
| Payoff administration and release | Payoff | State-dependent | Per item | Jurisdiction, release mechanism |
Two mechanics inside that table are easy to read past.
The first is whether interest accrues on the committed loan amount or on the disbursed balance. On a file with a renovation or construction holdback, the outstanding balance grows as draws fund. A note that charges interest on the full commitment from day one produces a different number than one that charges on funds actually advanced. Which convention applies is a question for the note, not an assumption to carry into a model.
The second is the upfront percentage charge. A point is a unit: one point equals one percent of the loan amount. An origination fee is the lender's charge for processing and underwriting, and may be quoted in points or as a flat dollar amount. Discount points are a separate, optional charge paid at closing to reduce the note rate. Both are quoted in points, so the term sheet has to say which charge it is and what it pays for.
A Worked Illustrative Model
The model below is built from illustrative assumptions chosen for this article, not from any actual term sheet. It answers one question: under these stated inputs, what is the total cost of the financing?
These figures are not TLD pricing. They are not a quote. They are not an offer. They are not an approval or eligibility determination. They are not a universal market range.
| Model input | Value used |
|---|---|
| Loan amount, base case and scaling tiers | $200,000; $500,000; $1,000,000 |
| Note rate, interest only | 11.0% annually |
| Interest convention | Simple interest on the full balance for the full period |
| Upfront percentage charge | 2.00 points |
| Stated term | 12 months |
| Holding period modeled | 9 months |
| Third-party closing items, modeled lump sum by tier | $3,500 at $200,000; $5,500 at $500,000; $8,000 at $1,000,000 |
| Draw inspection and administration | 4 draws at $250 |
| Servicing, modeled separately | $35 monthly |
| Exit fee | 1.00% of original loan |
| Payoff administration | $400 |
| Excluded from the model | Property taxes, insurance, utilities, maintenance, association dues |
| Excluded from the model | Default interest, late charges, enforcement costs |
In order: the upfront charge is 2.00% of $200,000, or $4,000. Third-party closing items are modeled at $3,500. Interest at 11.0% annually on $200,000 is $1,833 per month rounded to the dollar, and nine months of that is $16,500. Four draws at $250 add $1,000. Servicing at $35 per month for nine months adds $315. The exit fee is 1.00% of the original loan, or $2,000. Payoff administration adds $400. The total modeled financing cost is $27,715, which is 13.86% of the loan amount across the nine-month hold.
The rate, points, and fee amounts above are chosen assumptions. The dollar totals and the percentages derived from them are calculated outputs of those assumptions, not observed market figures. Monthly figures are displayed rounded to the dollar; the totals are computed from unrounded arithmetic.
How Holding Period Changes Total Cost and the Simple Annualized Ratio
To compare the same structure across holding periods, this article uses one ratio, defined so it can be checked:
simple annualized cost ratio = total modeled financing cost / loan amount x 12 / months held
That ratio is a comparison tool built from the model above. It is not an annual percentage rate, not an effective annual yield, not a regulatory disclosure, and not a substitute for the actual note, fee schedule, or closing documents.
Hold the modeled term sheet constant and change only the timeline. The items that do not vary with time, meaning the upfront charge, third-party closing items, draw charges, the exit fee, and payoff administration, total $10,900. The items that do vary with time, meaning interest and servicing, run $1,868 per month rounded to the dollar.
At three months the total modeled financing cost is $16,505, or 8.25% of the loan. The simple annualized cost ratio is 33.01%.
At nine months the total is $27,715, or 13.86%. The ratio is 18.48%.
At twelve months the total is $33,320, or 16.66%. The ratio is 16.66%.
Two things move in opposite directions. Total dollars rise with every additional month, while the simple annualized ratio falls, because the time-invariant charges spread across a longer period. Neither number is wrong. Total dollars is what the project pays; the ratio lets two structures be compared.
This model varies only the holding period. It does not vary the note rate, so it cannot show that duration matters more than pricing. What it shows is that one quoted rate produces materially different outcomes depending on how long the loan is outstanding, which is a reason to model the timeline that could happen rather than only the one that is planned.
Working through a term sheet and want a second read on where the cost lines actually land? Talk to the Desk. Fifteen minutes with a licensed loan officer, no pitch, before anyone asks for paperwork.
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What Changes at $500,000 and $1,000,000
Run the identical structure at larger loan amounts. Everything except the loan amount and the modeled third-party closing items is unchanged.
| Modeled result, 9-month hold | $200,000 loan | $500,000 loan | $1,000,000 loan |
|---|---|---|---|
| Upfront charge, 2.00 points | $4,000 | $10,000 | $20,000 |
| Third-party closing items | $3,500 | $5,500 | $8,000 |
| Note interest, 9 months | $16,500 | $41,250 | $82,500 |
| Draw, servicing, and payoff items | $1,715 | $1,715 | $1,715 |
| Exit fee, 1.00% | $2,000 | $5,000 | $10,000 |
| Total modeled financing cost | $27,715 | $63,465 | $122,215 |
| Share of loan across the hold | 13.86% | 12.69% | 12.22% |
| Simple annualized cost ratio | 18.48% | 16.92% | 16.30% |
The modeled totals are $27,715, $63,465, and $122,215, which come to 13.86%, 12.69%, and 12.22% of each loan across the nine-month hold, and the simple annualized cost ratios are 18.48%, 16.92%, and 16.30%. The costs that do not scale proportionally with loan size, meaning the modeled third-party closing items plus the draw, servicing, and payoff charges that hold at $1,715 on every tier, come to 2.61% of the $200,000 loan and 0.97% of the $1,000,000 loan. Expressed through the same ratio across the nine-month hold, that is 3.48 points against 1.30 points, and that 2.18-point difference accounts for the entire gap between the two annualized figures.
Within this model, the smaller the loan, the more weight the flat-dollar items carry. That is arithmetic, not a market observation.
Reading the Documents Together
A term sheet is a starting point, not a complete cost picture. Several items in the table above are not fixed at that stage. Third-party costs can be estimates until the orders come back. Draw-related expenses depend on how many draws are requested and what inspections are triggered. Payoff charges may not be quantified until a demand statement is ordered. Extension and default costs depend on events that have not happened yet.
A complete review combines the term sheet, fee schedule, draw procedures, loan documents, third-party estimates, and a realistic exit timeline. Any single document may omit a cost or a dependency the calculation needs.
Underwriting applies the lender's credit policy and makes the applicable decision. A loan officer flagging a likely issue early is not an approval, and a term sheet is not an approval. Conditions, valuation outcomes, and eligibility findings can change the structure or end the transaction. A file can also remain conditional after the major credit questions appear resolved, which the Clear to Close guide covers.
Where a program requires an appraisal, that work is performed under professional standards. The Uniform Standards of Professional Appraisal Practice provide widely recognized ethical and performance standards for appraisal practice. Which requirements apply to a particular assignment depends on the assignment itself, applicable law, regulation, and agreement.
Pattern-level observations in Lending Desk articles come from the aggregated, anonymized sources described on the methodology page. The figures here are illustrative modeling, not observations from a transaction; what a specific deal costs is set by its own documents.
Questions Investors Ask About Hard Money Loans
What exactly is a hard money loan?
A hard money loan is short-term financing secured by real estate and sized primarily against the collateral. This article covers the business-purpose use of that structure. The note sets the actual maturity. Credit, liquidity, and experience still factor in, but the property carries the analysis rather than personal income documentation.
How does a hard money loan work?
The lender reviews the property, the plan, and the file, issues a term sheet, and orders valuation and title work. At closing an upfront charge and third-party costs are collected. Where renovation or construction is involved, funds may be held back and released through draws. The loan resolves at maturity through sale, refinance, or another documented exit.
How much money do you need to put down for a hard money loan?
There is no universal figure, and this article does not publish one. The required contribution follows from how the lender sizes the loan, which is expressed through ratios against value or against total project cost, and from which upfront costs the borrower pays at closing. The term sheet and the lender's sizing method give the answer.
How risky is a hard money loan?
Risk concentrates in three places: the exit, the timeline, and the cost stack. A short maturity means the loan must resolve on a date. If the exit slips, interest and servicing keep accruing and extension or default provisions may apply. The model above shows how a longer hold changes total cost. Property and execution risk sit on top.
Do I need an LLC for a hard money loan?
Entity requirements are set by the lender's program and by the jurisdiction, and what applies to a specific transaction is what the term sheet and loan documents state. Entity formation also carries tax and legal consequences outside the scope of an editorial article. Verify the requirement with the lender, and take entity advice from a qualified professional.
Is a hard money loan a bad idea?
It is a tool with a specific fit. It can work where speed, property condition, or a defined short-term event makes longer-term financing impractical and a credible exit exists. It fits poorly where the exit is undated, the budget is provisional, or total cost has not been modeled against a realistic timeline.
How long do you have to pay back a hard money loan?
This is short-term financing, and the note states the maturity date. What matters alongside the stated term is whether extension is available, on what conditions, at what cost, and whether it is discretionary. A note with no extension provision means maturity is a hard date.
What is the average interest rate on a hard money loan?
This article does not publish a rate or a range. An average would not tell an investor what their own note says. Pricing on business-purpose short-term loans varies by lender, program, property, structure, and file. The rate that matters is the one stated in the note, read together with the upfront charge and every other line in the cost stack.
What are typical terms for a hard money loan?
Terms vary by lender and program, so a published set of typical terms would be misleading. The items to pin down: the stated term, the sizing method, the upfront charge and what it pays for, the interest convention, the draw procedure, any minimum interest provision, extension availability, and the payoff and exit provisions.
Is it hard to get approved for a hard money loan?
Nothing here indicates whether any transaction will be approved. Underwriting applies the lender's credit policy to the complete file, and the property, plan, documentation, entity, and exit factor in. A loan officer can identify likely issues before submission, but that is file preparation, not a credit decision.
What is the 70% rule for hard money loans?
The 70% rule is an investor rule of thumb suggesting a maximum purchase price of roughly 70% of a property's after-repair value less estimated renovation costs. It is a screening heuristic, not a lending standard, and lenders size loans by their own criteria. The fix and flip loan guide works through how completed-value and cost ceilings actually apply.
Bring a scenario to a licensed loan officer and ask for the total modeled cost at the planned timeline and at a longer one. Talk to the Desk.
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Editorial Scope
The Lending Desk publishes educational information about business-purpose real estate financing for investment property. This article is not a quote, an offer, an approval, or an eligibility determination, and it does not establish universal pricing or terms. Every dollar figure, rate, fee, and percentage in the worked financing models is an illustrative modeling input or a calculated output of those inputs, used to show cost structure, not an observed market value. The 70% rule described in the questions section is an investor screening heuristic, not a model input or output. Nothing here replaces review of the actual term sheet, fee schedule, loan documents, third-party estimates, applicable jurisdiction, and complete file, or advice from qualified legal, tax, and valuation professionals.