10 Important Terms to Know When Offering Hard Money Loans

Hard-money loans are a viable option for real estate financing, but they are often underutilized. When compared to traditional bank loans, hard money loans can provide a faster and more flexible solution—particularly for those looking to finance fix-and-flip projects or who need quick access to capital.

Unlike conventional loans, hard money loans are based on collateral rather than creditworthiness. This makes them a great alternative for borrowers who may not meet the strict requirements of traditional lenders. However, hard money loans also come with their own set of challenges.

Since they carry more risk, they also typically come with higher interest rates. Lenders may also require personal guarantees, especially when the collateral is limited. As a third-party originator or wholesale partner, it’s crucial to understand these terms to guide your clients effectively and ensure they work with reputable lenders who offer competitive financing options.

In this article, we will delve into 10 important hard money lending terms that every mortgage broker, private lender, referral partner should be familiar with when assisting clients in securing a hard money loan.

10 Hard Money Loan Terms You Need to Know

Loan-to-Value Ratio (LTV)

The Loan-to-Value Ratio (LTV) compares the loan amount to the property value (which often serves as collateral). A lower LTV means the borrower is financing a smaller portion of the property’s value, reducing the lender’s risk. Lenders typically offer hard money loans with LTVs ranging from 60% to 75%, depending on the property type and borrower profile.

As a mortgage broker or private lender, understanding LTV is essential when advising clients on how much financing they can secure and what down payment might be required.

After-Repair Value (ARV)

The After-Repair Value (ARV) estimates how much a property will be worth after renovations. Lenders use this figure to determine how much they are willing to lend. Typically, hard money lenders provide a loan based on a percentage of the ARV, which can go up to 75-80% in some cases.

For wholesale and referral partners, educating clients on ARV ensures they secure the right funding for their real estate investments while maximizing their financing potential.

Points

Points are upfront fees charged by the lender, typically expressed as a percentage of the loan amount. Each point equals 1% of the total loan.

For example, if a lender charges 2 points on a $200,000 loan, the borrower will pay $4,000 in fees.

When discussing hard money loan terms with your clients, be transparent about how points affect the total borrowing cost and compare different lenders to secure the best terms.

Interest Rate

Borrowing money through a hard money loan requires payment of interest at an annual percentage rate. The interest rates for hard money loans exceed conventional loans because they typically range from 6% to 14% based on borrower risk level and property type.

Mortgage brokers and referral partners serve an essential function in explaining to clients how higher interest rates lead to faster loan approvals which makes hard money loans more suitable for short-term investments.

Loan Term

The duration of hard money loans can range from 6 months to 3 years because they are intended to be short-term financing solutions. They exist to provide fast money to investors who need funding for property flips, renovation projects, or urgent property acquisitions.

When working with real estate investors, emphasize the importance of aligning the loan term with the project's timeline to ensure smooth repayment and refinancing strategies.

Prepayment Penalty

Some hard money lenders charge a prepayment penalty if the loan is repaid before the agreed-upon term. The fee exists to safeguard lenders from losing their anticipated interest payments.

Mortgage brokers and private lenders must verify if loans have prepayment penalties because clients who plan to sell or refinance also need to know about these fees.

Default

Default happens when borrowers stop making their payments according to the loan contract or violate any terms of the agreement. The failure to make timely payments or breach the loan agreement can result in the lender seizing the property used as collateral.

Wholesale partners and third-party originators can educate their clients about default risks, and establish exit plans that will protect themselves from financial losses.

Collateral

Collateral is the property or asset used to secure the loan. Since hard money loans are asset-based, the lender places more importance on the property’s value than the borrower’s credit score.

Mortgage brokers and referral partners need to relay the details of how collateral functions with the loan, and which assets they can use as loan security.

Loan-to-Cost Ratio (LTC)

The Loan-to-Cost Ratio (LTC) evaluates the loan amount against the entire acquisition and development costs of a property. LTV examines only property value but LTC evaluates both purchase price and renovation expenses together with property value.

Lenders typically provide renovation loans with an LTC ratio between 70% and 80%. Assisting clients in determining their LTC ratio can help them secure sufficient project funding.

Debt Service Coverage Ratio (DSCR)

The Debt Service Coverage Ratio (DSCR) evaluates how well a property generates revenue to pay off loan installments. The financial stability of an investment improves when DSCR ratios rise thus decreasing the lender's exposure to risk.

The minimum Debt Service Coverage Ratio required by RCN Capital stands at 1.05. Commercial mortgage brokers need to teach their clients about DSCR improvements through increased rental income and expense reduction.

Why These Hard Money Loan Terms Matter for Brokers & Partners

As a mortgage broker, private lender, or referral partner having a deep understanding of hard money lending terms allows you to:

• Provide better financial guidance – Helping your clients navigate complex loan terms ensures they secure the best financing options.
• Build stronger lender relationships – Brokers and referral partners who understand industry terminology can negotiate better terms and access exclusive loan programs.
• Increase client satisfaction and retention – Educating clients on loan terms builds trust and positions you as a valuable financing expert.
• Improve lead conversion – Knowledgeable brokers can match clients with the right loans faster, increasing deal closures.

Partner with RCN Capital for Competitive Hard Money Loan Solutions

RCN Capital is a private lender that delivers adaptable financing options at rapid speeds to professionals who work in real estate. Our loan programs cater to:

• Mortgage brokers who want to increase their financing capability
• Private lenders seeking to fund real estate projects
• Referral partners & affiliate partners wanting to earn commissions for quality referrals

We offer:

• Short-term fix & flip loans

• Long-term rental financing

• New construction loans

By partnering with RCN Capital, brokers and wholesale partners gain access to competitive loan terms, quick approvals, and a trusted lender network that supports real estate success.

Looking to offer your clients the best hard money loan solutions? Contact RCN Capital today!