A hard money loan example is the fastest way to understand how hard money loans work in real estate investing. This article walks through a complete Houston fix and flip with every number: purchase price, loan amount, interest rates, origination fee, interest only payments, draw schedule, closing costs, timeline, and final profit. Then a second hard money loan scenario shows a deal that fails and why we would tell the borrower to pass. We broker business-purpose hard money loans on investment property only.
How Hard Money Loans Work for House Flippers and Real Estate Investors
Hard money loans are short term loans secured by real estate, not by the borrower's creditworthiness or income. Hard money lenders underwrite the value of the property rather than the borrower's credit score or tax returns, which means loan approval is based on the asset, not the person. That is the crucial difference compared to traditional mortgages, traditional loans, traditional financing, and conventional financing from banks or credit unions. Most hard money loans fund in as few as 7 business days, carry interest only payments, and end with a balloon payment when the loan matures. Hard money loans come with higher interest rates than conventional mortgages, but they close in less time, need less documentation, and lend on properties in any property condition that traditional lenders typically decline.
The loan amount on a hard money loan is primarily determined by the after repair value (ARV) of the property, generally up to 75% loan to value. Hard money lenders may lend up to 90% of total project cost, covering the purchase price plus the renovation budget, and release funds through draws as work is completed. Most hard money lenders charge 1.5 to 3 points as an origination fee and offer short loan terms ranging from 6 to 18 months with no prepayment penalties. Borrowers make interest only payments each month, then pay back the full principal via a balloon payment at the end. That balloon repayment comes from either selling the property or completing a refinance into a long term mortgage, a DSCR loan (debt service coverage ratio), or another type of permanent financing. In other words, a hard money loan is short term financing, not a 30 year mortgage. These are asset based loans secured by real estate collateral.
Hard money financing is the ideal tool for house flippers, real estate investors taking on fix and flip projects, and borrowers who need fast funding to acquire and renovate properties. Because hard money lenders focus on collateral rather than creditworthiness, the approval process is faster and considered less stringent compared to traditional lenders, traditional bank loans, and banks. The drawbacks of hard money loans are higher interest rates, higher fees, and short repayment terms. But for profitable flips, the speed and access to capital more than cover the higher costs. That is how this type of lending works in the states where these lenders are active, and these practical examples prove it. Hard money loans may look expensive on the surface, but the numbers below show why investors choose hard money loans on nearly every project where timing matters.
Hard Money Loan Example #1: Houston Fix and Flip (Full P&L)
Finding the Investment Property
An investor finds a distressed single family house in Houston's East End. The property's current condition: deferred maintenance, outdated kitchen, damaged flooring. Purchase price: $215,000. Estimated renovation: $55,000. After repair value, confirmed by comps and an appraisal: $360,000. Total project cost: $270,000. The investor is confident the property is worth pursuing because the numbers meet the 70 percent rule, and in addition the market area offers strong comps.
The buyer needs to close this deal quickly because people are making competing offers and the seller needs a fast closing. Traditional banks take 30 to 45 days for loan approval. A hard money lender can close this hard money loan in 7 to 14 days, offering terms that banks simply cannot match. The investor contacts Kestrel Lending, a Texas hard money broker and submits the application. Within 24 hours, a term sheet is arranged with a lender on our panel who is taking on this type of deal. In many cases, hard money loans are the only financing option allowing borrowers to close in time. The lender offers terms based on the property, not credit checks or income.
Hard Money Loan Terms and Term Sheet
| Loan Type | Fix and flip loan (short term loan) |
| Purchase Price | $215,000 |
| Renovation Budget | $55,000 (rehab costs) |
| After Repair Value (ARV) | $360,000 |
| Total Loan Amount | $243,500 (90% of project cost) |
| LTV (ARV) | 67.6% |
| Loan to Cost | 90.2% |
| Interest Rate | 11.5% (interest only) |
| Origination Fee | 2 points ($3,870) |
| Loan Term | 12 months |
| Monthly Payment | Interest only payments on drawn balance |
| Prepayment Penalties | None |
The borrower's down payment on this hard money loan is $21,500 (10% of purchase). No large down payment is required because the lender is comfortable with the value of the property and the structure of the hard money loan. The minimum down payment varies by lender, but most hard money lenders require 10% to 25% from borrowers. Learn more about hard money loan down payment requirements.
Closing Statement: Day 1
At closing, the hard money lender funds the purchase. Renovation money is held in escrow and released through draws. Here is what the closing costs look like on this hard money loan example:
| Item | Amount |
| Home purchase price | $215,000 |
| Loan amount (acquisition portion) | $193,500 |
| Origination fee (2 points on the hard money loan) | $3,870 |
| Title, escrow, insurance | $3,200 |
| Appraisal fee | $500 |
| Borrower cash to close | $28,570 |
The borrower brings $28,570 to the closing table. That covers the down payment, origination fee, appraisal, and other costs. The hard money lender's only protection is the property itself, which serves as collateral to back the loan. If the borrower fails to repay the hard money loan, the lender can foreclose. That risk is why the lender needs equity from the borrower.
How the Draws Work on a Hard Money Loan
Hard money loans work on a draw schedule. The lender holds rehab funds and releases money as each step of renovation is completed, confirmed by inspection. Borrowers typically pay contractors, then request a draw for repayment. Here are the 3 draws in this hard money loan example:
| Draw | Work Completed | Amount | Cumulative |
| Draw 1 (Month 1) | Demo, framing, rough plumbing, electrical | $20,000 | $20,000 |
| Draw 2 (Month 2) | Drywall, flooring, cabinets, fixtures | $20,000 | $40,000 |
| Draw 3 (Month 3) | Paint, countertops, landscaping, punch | $15,000 | $55,000 |
Each draw needs an inspection by the lender. Interest only payments increase as more funds are drawn on the hard money loan because hard money lenders charge interest on the outstanding balance. This is an important factor to keep in mind when you calculate the total cost of borrowing. Every hard money loan has this structure, and most lenders offer information on how the payment schedule works before you close.
Interest Only Payments Over a 5-Month Hold
The borrower completes the renovation in three months, then lists the home for sale. It sells at the start of month 5. Here is the total interest paid on this hard money loan. The rate is 11.5%.
| Month | Outstanding Balance | Monthly Payment |
| Month 1 | $193,500 | $1,855 |
| Month 2 | $213,500 | $2,047 |
| Month 3 | $233,500 | $2,238 |
| Month 4 | $248,500 | $2,382 |
| Month 5 | $248,500 | $2,382 |
Total interest paid: $10,904. Compared to traditional mortgages with lower rates, the total interest on a hard money loan is higher. But the hard money loan closes in days instead of months, and the lender funds properties in any condition. The higher rates are the cost of speed and the flexibility hard money loans provide. Investors need to weigh the cost of interest against the potential profit the deal can produce. On the other hand, taking a hard money loan and completing the flip in six months or less means the total interest costs are manageable compared to the gross profit.
Sale and Full P&L
The investor sells the home for $355,000 (slightly below ARV as a result of market conditions). Here is the complete profit and loss for this hard money loan:
| Income | |
| Sale price | $355,000 |
| Expenses | |
| Purchase | $215,000 |
| Renovation costs | $55,000 |
| Origination fee (2 points) | $3,870 |
| Total interest paid (5 months) | $10,904 |
| Buy-side closing costs (title, insurance, appraisal) | $3,700 |
| Sell-side fees (commissions, title) | $17,750 |
| Holding expenses (taxes, insurance, utilities) | $4,200 |
| Total Costs | $310,424 |
| Gross Profit | $44,576 |
The investor invested $28,570 and walked away with $44,576 in profit, a 156% return in five months. The total cost of the hard money loan financing (total interest plus origination fee) was $14,774. Use our hard money loan calculator to calculate your own numbers. The hard money loan costs are easy to estimate once you know the loan amount, rate, and hold period. Investors who pay attention to these costs and run the numbers before taking on a hard money loan consistently capture greater returns year after year.
Hard Money Loan Example #2: A Deal That Fails (Why We Say No)
Not every deal works. Here is a scenario showing the disadvantages of jumping into a project without running the numbers on the hard money loan first. No hard money loan can turn a bad investment into a good one, no matter how appealing the property looks. A couple of common factors matter here: purchase price relative to ARV, and the estimated renovation costs.
A borrower finds a house in a Houston suburb. Purchase: $285,000. Renovation budget: $70,000. After repair value based on comps: $370,000. Total project cost: $355,000.
Apply the 70 percent rule: (0.70 x $370,000) minus $70,000 = $189,000 maximum purchase. The buyer is paying $285,000, roughly $100,000 over the threshold. Even assuming a conservative plan, the numbers fail. No hard money loan fixes that gap.
Why this deal creates a financial loss:
- Hard money loan amount: approximately $326,500
- Total interest paid over six months at 12%: approximately $17,800
- Origination fee: approximately $6,500 (2 points)
- Sell-side costs, commissions, and fees: approximately $18,500
- All-in total costs: roughly $368,800
- If the property sells at ARV ($370,000), the investor nets approximately $1,200 before taxes
- Any cost overrun, timeline delays, or extension means losses, and the borrower could lose their entire down payment
A reliable hard money lender will catch this before issuing a hard money loan. At Kestrel Lending, we run these numbers before any lender sees the file. If the hard money loan does not meet standards, we tell borrowers the same day and protect them from risk. Our underwriting process is free, and it saves borrowers money, time, and fees. We are concerned with results, not just placing a loan.
Hard Money Loans vs. Traditional Mortgages: Why Investors Pay High Interest Rates
Many investors and people ask why they should pay high interest rates on a hard money loan when a mortgage from a bank or conventional financing offers lower rates. The common answer: banks generally do not fund these types of projects and do not lend on properties facing renovation. Traditional mortgages and traditional loans require 30 to 45 days for approval, full income documentation, stringent credit requirements, and properties in move-in condition. Applying for a hard money loan is easy by comparison and offers much faster access to funds. Hard money loans close in days, fund the home purchase and renovation, and need no income verification or credit documentation, cutting through the red tape that slows traditional financing. Lenders may offer terms on a hard money loan within hours of receiving the deal information.
Hard money lenders accept more risk by lending on short term loans, and that risk is priced into higher interest rates and fees. If a borrower defaults on a hard money loan, the lender can foreclose on the property, but foreclosure is difficult and expensive. That is why hard money lenders require a down payment, charge origination fees, and offer short terms. For investors, these short repayment terms make sense because the hard money loan is short term financing, not a 30 year mortgage. The idea is straightforward: buy the house, renovate the home, sell or refinance into a long term mortgage or rental loan, and repay the hard money loan in full. Hard money loans are not considered a last resort or riskier option. In many instances, hard money loans are the most suitable financing products for investors who need to acquire and purchase property quickly in competitive market areas. The potential benefits of speed, flexibility, and leverage offset the higher cost of the hard money loan in every profitable flip or bridge loan scenario. Compared to taking a conventional mortgage or commercial loan that takes weeks, a hard money loan helps investors secure deals that would otherwise be lost, and the lender can extend or modify terms if the project needs more time.
What Borrowers Need to Qualify for Hard Money Loans in Texas
Hard money lenders and hard money loan providers look at the deal first and the borrower second. Most lenders on our panel look at the value of the property, the scope of work, and the exit strategy before the hard money loan is approved. Here is what individual investors and borrowers need to obtain and secure a hard money loan:
- Minimum 10% to 25% down payment (ranging based on experience and deal structure)
- Credit score: 620+ for most hard money lenders (some lenders provide hard money loan options for borrowers with a low credit score at lower LTV)
- Scope of work and rehab cost estimate
- Purchase contract on the investment property
- Exit strategy: sell, resell, or refinance into a long term loan or rental mortgage
- Experience helps borrowers obtain better hard money loan terms, rates, and higher loan amounts, but new house flippers can qualify with the right deal
No bank statements, no tax returns, and no income proof required on most hard money loans. Hard money loan approval typically takes 24 to 48 hours, and the lender is primarily concerned with the property's value and the deal. Approved borrowers can expect fast funding, flexible repayment terms based on the asset, and a quick process. That is the advantage hard money lenders and financing companies provide to the real estate investing market: faster access to capital, more options, and less stringent credit standards than a traditional mortgage, a commercial loan from a bank, or conventional mortgages from traditional lenders. Investors who live in any Texas market can submit a hard money loan application and receive terms within 24 hours.
If you are considering long term holds or building a rental portfolio for cash flow and wealth, a hard money loan or bridge loan is typically the first step. Borrowers take hard money loans to buy, renovate, and stabilize a rental property with tenants, covering the costs of renovation and paying interest only during the hold, then transition into a DSCR refinance or long term rental mortgage at a lower rate. Many investors repeat this cycle with every new property they buy, shopping for the best hard money loan terms each time and establishing a relationship with a broker who offers expertise in placing these loans. There are several ways hard money loans help investors build a real estate portfolio. Learn about bridge loans and DSCR vs. hard money in our guide.
Frequently Asked Questions
How much does a hard money loan cost on a typical fix and flip?
On a $250,000 hard money loan with a 5-month hold, borrowers can expect to pay roughly $12,000 to $15,000 in total interest plus 2 to 3 points in origination fees. The total cost of the hard money loan depends on the interest rate, the loan term, and how quickly you sell. Check our rates page for current hard money loan rates, updated each month.
Can I use hard money loans for rental property or commercial property?
Yes. Hard money loans cover fix and flip, bridge loans for rental property, cash out refinance on investment property, and select commercial property and commercial loan transactions. Hard money lenders fund any non-owner occupied property with a clear exit. We do not finance owner occupied homes or any homeowner personal loan products. We broker business-purpose hard money loans only.
What happens if a borrower defaults on a hard money loan?
If a borrower defaults, the hard money lender can foreclose on the property. The property is the collateral securing the hard money loan. That is why hard money lenders require equity from borrowers: the down payment creates a buffer so the lender can recover funds if the borrower is unable to repay the hard money loan when it matures.
Do hard money loans require a balloon payment?
Yes. Hard money loans typically require a balloon payment of the remaining principal at the end of the loan term. Monthly payments during the hold are interest only. Borrowers pay back the full balance when they sell the property or refinance the hard money loan into a new loan with longer repayment terms. The balloon payment structure keeps monthly payments lower during the project.
How do hard money loans compare to traditional mortgages?
Hard money loans carry higher interest rates than traditional mortgages, but they close in days, require less stringent credit requirements, and fund properties banks will not finance. A traditional mortgage offers lower rates but takes 30 to 45 days and the property needs to be in good condition. For short term projects, hard money loans are generally the better fit.
What is the difference between a hard money lender and a hard money broker?
A hard money lender lends capital directly. A broker like Kestrel Lending shops your hard money loan to multiple lenders and financing companies, then places it with the lender offering better terms, rates, and fees. Borrowers find competitive rates and access private investors they would not find on their own. Our fee is disclosed upfront.
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