hard money loans vs traditional loans

Here’s a clear, side-by-side breakdown of Hard Money Loans vs. Traditional Loans, including how they work, pros/cons, and when to use each.

? What’s the Difference?

Feature	Hard Money Loan	Traditional Loan
Purpose	Short-term financing for investments (flips, rehabs)	Long-term home ownership or rentals
Loan Type	Asset-based (property is the main factor)	Income & credit-based
Speed	Fast (3–10 days)	Slower (30–45 days)
Term	Short (6–24 months)	Long (15–30 years)
Interest Rate	High (8%–15%)	Lower (5%–8%, based on market & credit)
Down Payment	20%–30% (or more)	3%–20%, depending on loan type
Approval Criteria	Based on property value & exit strategy	Based on borrower income, DTI, credit history
Used For	Fix & flip, BRRRR, distressed or auction properties	Primary homes, long-term rentals

? How Hard Money Loans Work

Funded by private lenders, not banks
Based on After Repair Value (ARV) of the property
Often used by house flippers or investors who need fast access to capital
Interest-only payments until payoff or refinance

? Example:
Buy a $200K home needing $50K in renovations. A hard money lender offers 70% of ARV ($300K), so you get $210K to cover purchase and rehab.

? Pros & Cons

? Hard Money Loans

Pros:

✅ Fast approval and funding
✅ No need for high credit scores
✅ Ideal for short-term projects or distressed deals
✅ Can fund deals traditional banks would reject

Cons:

❌ Very high interest rates and fees
❌ Short repayment terms
❌ Often interest-only payments
❌ Risk of foreclosure if exit strategy fails

? Traditional Loans

Pros:

✅ Low interest rates
✅ Long repayment terms = affordable monthly payments
✅ Wide variety of programs (FHA, VA, USDA, conventional)
✅ Great for long-term buy-and-hold or owner-occupancy

Cons:

❌ Slower closing process
❌ Strict credit/income requirements
❌ Not suitable for fixer-uppers or auction properties
❌ Usually requires full documentation

? When to Use Each

Scenario	Best Loan Type
Fix & flip or BRRRR strategy	? Hard Money Loan
Poor credit but good property deal	? Hard Money Loan
Buying a primary residence	? Traditional Loan
Holding a rental long-term	? Traditional Loan
Buying turnkey investment property	? Traditional Loan
Need fast closing (under 10 days)	? Hard Money Loan

? Pro Tip: Combine Both

Many investors use hard money to buy and renovate a property, then refinance into a traditional loan once the value increases (known as the BRRRR method: Buy, Rehab, Rent, Refinance, Repeat).

? Example Cost Comparison (on $250,000 property)

Cost Factor	Hard Money Loan	Traditional Loan
Interest Rate	12% (interest-only)	6% (fully amortized)
Term	12 months	30 years
Monthly Payment	~$2,500 (interest only)	~$1,500 (principal + interest)
Closing Time	5–7 days	30–45 days
Loan Fees	2–5 points upfront	~1%–2% closing costs

? Final Verdict

Want to…	Go With…
Flip a property fast, with no income proof	✅ Hard Money
Invest long-term or buy a home to live in	✅ Traditional
Buy a fixer-upper that banks won't touch	✅ Hard Money
Lock in a low rate for decades	✅ Traditional
Refinance after a rehab	✅ Traditional (after hard money)