Choose hard money when speed, rehab funding or a distressed property decides the deal, and choose conventional when you are buying a stabilized property to hold for years and want the lowest rate. Many investors use both: close fast with hard money, then refinance into long-term debt once the property is stable. That two-step path is the safest way to use each tool for what it does best.
TL;DR:
- Hard money typically carries rates of 8% to 15%, lasts 6 to 24 months, and releases renovation funds through inspected draws.
- Hard money can close in 10 to 14 days, versus 30 to 45 days or longer for conventional financing, making deadlines decisive.
- Conventional financing suits a stabilized rental you plan to hold, provided you can document income and credit and the property meets condition standards.
- Set a sale or refinance before borrowing: hard money commonly lasts 6 to 24 months, and delays can leave the full balance due.
- Eligible business owners buying commercial property or equipment can explore SBA 504 financing, which offers long fixed terms and down payments as low as 10%.
Table of Contents
- 1. What is a hard money loan and how do its terms work?
- 2. What is a conventional loan and what does it require?
- 3. How do speed, cost, sizing and documentation compare?
- 4. What are the pros and cons of each loan type?
- 5. When should you pick hard money, conventional, or both?
- 6. What does a six-month flip look like in numbers?
- 7. How do credit score and financial history affect approval?
- 8. What are the down payment requirements and assistance options?
- 9. Which loan fits which real-world scenario?
- 10. What do DSCR and BRRRR mean for financing?
- 11. Where does SBA-style long-term financing fit?
- 12. How can we help with long-term commercial financing?
- FAQ
- Sources
1. What is a hard money loan and how do its terms work?
A hard money loan is an asset-based, short-term loan secured by real property. The lender cares most about the collateral and the after-repair value (ARV), not your pay stubs. That is why investors use it when a property is distressed, an auction deadline is close, or a borrower’s income does not fit a bank’s underwriting box.
Here is what you can usually expect:
- Term: short, commonly 6 to 24 months, often with interest-only payments.
- Rate: higher than a mortgage, with points (upfront fees) added at closing.
- Underwriting: based on the deal, the property and your exit plan.
- Rehab money: funded through a draw schedule, so you request funds as work is completed and inspected.
Lenders size the loan against two ratios. Loan to value (LTV) compares the loan with what the property is worth. Loan to cost (LTC) compares it with what you will spend on purchase plus renovation. Flippers, LLC borrowers and buyers of as-is properties lean on this product most often.
Rate range: Typical hard money rates run 8% to 15%, with terms of 6 to 24 months, and the loan is underwritten on collateral and after-repair value rather than borrower income.
2. What is a conventional loan and what does it require?
A conventional loan is a standard mortgage that follows bank or Fannie Mae and Freddie Mac guidelines. It is fully amortizing, which means each payment reduces principal as well as paying interest. Lenders underwrite it on full income and credit documentation, so you will show tax returns, pay records, bank statements and a clean debt-to-income (DTI) ratio.
These are the features that matter to investors:
- Amortization: typically 15 to 30 years, which keeps monthly payments low.
- Pricing: lower long-term rates than private lending, though investment properties usually price above owner-occupied homes.
- Property standards: the home generally needs to be in livable, appraisable condition.
- Paperwork: more documents and more waiting than an asset-based loan.
Conventional financing is usually the better financial choice when you plan to hold a stabilized rental for years. A lower rate, a long amortization schedule and no balloon deadline all reduce your carrying cost. If you have strong W-2 income, healthy credit and a move-in-ready property, there is little reason to pay private-lender prices.
Speed trade-off: Conventional loans close in roughly 30 to 45 days or more, because full income and credit underwriting takes time.
3. How do speed, cost, sizing and documentation compare?
The two loan types differ on almost every axis an investor cares about. Here is how the practical comparison breaks down.
- Closing speed: hard money closes in roughly 10 to 14 days, while conventional usually takes 30 to 45 days or longer. In a competitive offer or an auction, that gap can decide who gets the property.
- Cost: hard money pairs a higher rate with upfront points. Conventional offers lower long-term rates, but you pay only if you hold long enough to benefit.
- Sizing: hard money lenders look at LTV and LTC and will fund rehab through draws. Conventional lenders size the loan on the property’s current appraised value and your income, so they rarely fund a gut renovation.
- Documentation: hard money leans on the asset and your exit plan, with entity borrowers welcome. Conventional leans on your income, credit and DTI.
- Property scope: hard money accepts as-is conditions, including distressed and construction projects. Conventional wants a property that meets condition standards.
Cost snapshot: Hard money rates in side-by-side comparisons often run 9% to 13%, against lower long-term conventional rates.
If you want a deeper technical look at private-lender structures, the bridge loan versus hard money breakdown explains how the two products differ in practice.
4. What are the pros and cons of each loan type?
Neither product wins everywhere. The right question is which trade-offs your deal can absorb.
Hard money
- Pro: fast closing, flexible criteria and rehab funding through draws.
- Con: higher rates, points and short terms that leave less room for delays.
Conventional
- Pro: lower rate and long amortization that make rentals cash flow.
- Con: stricter underwriting, more paperwork and a slower close.
Major bank explainers note that hard money can fund deals conventional lenders will not, but they warn about higher rates, shorter repayment periods and foreclosure risk when a carry plan fails.
A simple deal screen helps you weigh this. Add the hard money interest and points to your rehab budget, then subtract that total from your expected profit. If the deal still works with a delay baked in, the premium is affordable. If it only works on a perfect timeline, the speed is not worth the price.
5. When should you pick hard money, conventional, or both?
Match the loan to the deal signals, not to habit.
Signals that favor hard money: a tight deadline, a distressed or unfinanceable property, a rehab that needs funding, an LLC borrower, or a bank limit on how many conventional loans you can hold.
Signals that favor conventional: a long hold, strong W-2 income, healthy credit and a property that is already in good condition.
The two-step approach: experienced investors treat hard money as acquisition and rehab tooling and conventional as long-term hold tooling. You buy and renovate with short-term money, then refinance into long-term debt once the property is stabilized.
Use this quick checklist before you commit:
- Write down your exit: sale, refinance or long-term hold.
- Confirm the property will qualify for your exit loan once repaired.
- Compare total cost, including points, over your realistic timeline.
- Add a cushion for delays.
- Pick the loan that fits the timeline, not the lowest rate on paper.
Pro Tip: Line up your refinance lender before you close the hard money loan, so the exit is a plan and not a hope.
6. What does a six-month flip look like in numbers?
This comparison is illustrative, not market data.
A conventional loan at a lower rate might cost far less in interest over six months. But it may not close in time, and it will not fund the rehab. If the faster close lets you win the deal and the renovation adds more value than the financing cost, the premium paid for itself.
Exit discipline: Failing to secure a clear exit strategy before using short-term financing is a primary cause of investor problems, so the numbers only work when the exit is real.
7. How do credit score and financial history affect approval?
Credit matters very differently depending on the lender. Conventional underwriters weigh your credit score, payment history, DTI and documented income heavily. A recent late payment, a thin credit file or irregular self-employment income can slow or stop an approval, even when the property is excellent.
Hard money lenders underwrite the collateral and the after-repair value rather than borrower income. Credit still plays a role, since lenders want to see you can complete the project, and a stronger history can earn better pricing. But a bruised credit report is rarely a deal-breaker when the property and the plan are sound.
That flexibility is real, but it is not free. You pay for it through higher rates and points. If your credit is repairable, a common path is to use hard money now, improve your financial profile while the project runs, and then refinance into cheaper long-term debt once you qualify.
Before you apply to either type of lender, gather a clean set of records: recent bank statements, tax returns, entity documents if you borrow through an LLC, and a summary of your experience with similar projects. Lenders in both camps respond well to organization, and a prepared borrower closes faster.
8. What are the down payment requirements and assistance options?
Down payments differ by loan type. Hard money lenders typically finance a percentage of the purchase price or total cost (the LTV and LTC discussed above), so you bring the remainder in cash. Conventional investment loans also require a meaningful down payment, and the exact amount depends on the lender and the property type. Confirm current requirements directly with your lender, since they vary.
Assistance programs are where business owners have more options. If you are buying commercial property or equipment for your own company, our SBA 504 structure is built to lower the cash barrier. We offer financing with as little as 10% down, and our Down Payment Assistance Program helps qualifying borrowers cover the down payment need. Veterans and spouses may also look at our VetLoan Advantage Program, which carries a 1.0% processing fee.
For residential investors, assistance programs are narrower, and most down payment help is aimed at owner-occupied buyers. If you rely on cash for a hard money deal, plan your reserves to cover the down payment, rehab overruns and several months of interest. Running short of cash mid-project is one of the most common ways a good deal turns into a stressful one.
9. Which loan fits which real-world scenario?
Concrete situations make the choice easier.
Scenario 1: the auction purchase. A property goes to auction with a 10-day closing requirement. A conventional loan cannot close that fast, so hard money is the realistic choice, with a plan to refinance after repairs.
Scenario 2: the turnkey rental. You are buying a renovated duplex to hold long term, and you have steady W-2 income and good credit. Conventional financing offers lower long-term rates and a long amortization, so it may be the better fit.
Scenario 3: the distressed fixer. The home has a failed inspection and will not meet condition standards for a bank. Hard money accepts as-is condition and funds renovation through draws, then you refinance once it is livable.
Scenario 4: the business owner buying a building. An owner wants to buy the warehouse their company already occupies. Neither a short-term private loan nor a standard bank loan is the best fit here. A longer fixed-term SBA 504 structure, such as our Real Estate 20-Year Fixed or Real Estate 25-Year Fixed options, can make payments predictable. Our guide to SBA 504 versus conventional lending walks through that comparison.
10. What do DSCR and BRRRR mean for financing?
Two terms come up constantly when investors talk about exits.
DSCR is the debt service coverage ratio. It compares a property’s net operating income with its debt payments. A DSCR loan qualifies you on the rental income the property produces, not on your personal income, which makes it a popular refinance target for investors who cannot show conventional income.
BRRRR stands for buy, rehab, rent, refinance, repeat. The strategy commonly uses hard money for acquisition and rehab, then refinances into long-term debt once the property is stabilized. The cycle only works when the refinance appraises high enough to repay the short-term loan.
Two related ideas matter alongside them. ARV is the after-repair value, the number a hard money lender leans on most. Amortization is the schedule that pays down principal over time. Understanding these terms helps you read a term sheet quickly and spot whether a lender’s structure matches your exit.
If your exit is a refinance, our overview of commercial mortgage refinance options shows how long-term fixed debt fits that final step, and our explainer on asset-based lending clarifies how private-lender underwriting differs from bank lending.
11. Where does SBA-style long-term financing fit?
Here is our view. Most hard money versus conventional debates assume the borrower is a residential investor. Business owners who need to buy their own commercial property or equipment sit in a third category, and they are often poorly served by both options. A short-term loan creates refinance pressure, and a standard bank loan can demand a large down payment. A low down payment with a long fixed term solves both problems at once, and that is where SBA 504 belongs in the conversation.
— PHENYX
12. How can we help with long-term commercial financing?
If you own or run a business and need financing for commercial property or equipment, we can help you skip the short-term squeeze entirely. Our programs include the Real Estate 20-Year Fixed at 6.73%, the Real Estate 25-Year Fixed at 6.77%, the Equipment 10-Year Fixed at 6.58%, and the SBA 504 Refinance Program for existing commercial debt. They suit owners who want a lower down payment and a payment that stays put for years.
See our current options and start a conversation with our team at Cdcnewengland, or look at our SBA 504 Refinance Program if you want to restructure existing debt.
FAQ
What are the downsides of a hard money loan?
Hard money carries higher interest rates, upfront points and short repayment terms. If your renovation or sale runs late, the carry costs can eat your profit. Major bank explainers also warn of foreclosure risk when the exit plan fails.
Why would someone use a hard money loan?
Investors use it to close quickly, buy distressed properties and fund renovations that a bank will not finance. The lender focuses on the property and the deal rather than your income. It works best as a bridge to a cheaper long-term loan.
How long do you have to pay off a hard money loan?
Terms are short, commonly 6 to 24 months. Payments are often interest-only, with the full balance due at the end, so you need a sale or refinance ready before the deadline.
What is an example of hard money in practice?
A flipper buys a run-down house at a discount, borrows against its after-repair value, and draws renovation funds as work is finished. After the sale or a refinance, the hard money loan is repaid in full.
Sources
- Hard money loan
- Hard Money vs. Conventional Loans: A Side-by-Side Comparison | Lendoor
- Hard Money vs. Conventional Loans: Which Is Right for Your Deal? — Pimlico Capital
