What are the risks of a hard money loan?
The main risks of a hard money loan are a failed exit, a term that runs out before the project does, and cost that compounds at 10 to 14 percent plus fees while either of those happens. Each is preventable: confirm the refinance or sale before closing, take a term with a cushion, and keep reserves outside the loan.
The risks and their fixes
| Risk | How it shows up | Prevention |
|---|---|---|
| Failed exit | Refinance declined for credit, coverage ratio, or value; sale stalls | Pre-qualify the permanent loan before closing; buy at a price that works as a sale |
| Term runs out | Project delays push past maturity; extension fees; default rate | Take a term six months longer than the plan |
| Cost compounds | Interest and fees eat the margin on a slow project | Budget interest for the full term plus a cushion; keep an interest reserve |
| Overruns | Rehab costs exceed the holdback | 10 percent contingency; approved change orders |
| Low ARV | Appraisal under your estimate shrinks the loan | Provide comps and a detailed scope before the valuation |
| Draw delays | Contractor stalls while waiting for reimbursement | Working capital for one full phase |
| Foreclosure | Default on payments or maturity | Reserves; communicate with the lender early |
The exit is the biggest one
Hard money is a loan you have to get out of. If the plan is to refinance into a DSCR loan, that loan needs the property rented, the rent covering the new payment by about 1.20, your credit at 660 or better, and seasoning of three to six months. If any of those is not going to be true at maturity, the exit is a sale, and the purchase price has to make the sale work.
The cost of a slow project
On a $400,000 loan at 12 percent, every month of delay costs $4,000 in interest. A three-month slip on a flip with a $60,000 projected profit removes $12,000 of it, plus extension fees. Timelines on hard money projects should be built with a cushion because the lender is charging for every day.
Default and foreclosure
Hard money lenders foreclose faster than banks because the loan documents and the business model are built for it. A missed maturity or several missed payments can move to a notice of default within weeks in some states. The lender would usually rather extend a performing loan, but only if you talk to them before the problem.
Signs of a lender to avoid
- Fees due before a term sheet is issued.
- Terms that change materially at the closing table.
- No servicing, no draw process, or no written extension terms.
- Interest charged on the full loan while a large holdback sits with the lender.
How CommFi handles it
Our lending desk prices the hard money loan and the exit together and tells you if the exit does not work before you close. It funds direct when it fits, and when a specialist lender is the right match, the desk searches a database of 7,000+ lenders and the ones that fit compete for the file. Zero upfront fees.
Related reading
Related questions
- What is the biggest risk with a hard money loan?
- A failed exit. If the refinance or sale does not happen by maturity, extension fees, default rates, and foreclosure follow.
- How fast can a hard money lender foreclose?
- Faster than a bank. Depending on the state, a notice of default can follow a missed maturity within weeks.
- How do I protect myself on a hard money loan?
- Confirm the exit before closing, take a term with a six-month cushion, keep reserves outside the loan, and budget a 10 percent contingency.
- Can a hard money lender change terms at closing?
- It happens with some lenders. Get the term sheet in writing and walk away if the closing documents differ materially.
- Is hard money a bad idea for a first investment?
- Not if the deal works as a sale and the timeline has a cushion. It is a bad idea when the only exit depends on everything going right.
Property developer and licensed appraiser. 22+ years in real estate: TIC conversions, multi-unit redevelopments, mixed-use, fix and flips, commercial DSCR.