Are Hard Money Loans Worth the Risk When Buying a Home?

Hard money loans have long been a tool in the real estate investor’s playbook—but as home prices rise and lending standards remain tight, more individuals are turning to them out of necessity, or desperation after being denied from traditional conventional and non-QM financing. While they can serve a purpose in short-term situations, hard money loans are often a last resort—and come with serious risks that can lead to financial ruin if you aren’t careful.

In this post, we’ll break down what hard money loans are, who uses them, what the costs look like, and why most Texas homebuyers (especially in Austin, Dallas, or Houston) need to think twice before signing on the dotted line.

What Is a Hard Money Loan?

A hard money loan is a short-term, asset-backed loan that is typically secured by real estate. Unlike traditional mortgages that rely heavily on a borrower’s credit, income, and ability to repay, hard money lenders are primarily focused on the value of the collateral (aka the home or property being financed).

These loans are issued by private lenders or investment groups, not banks or credit unions. Because of the looser qualifications, hard money lenders can close quickly—sometimes in a matter of days—which is why they’re often used in fast-moving or unconventional real estate situations.

Who Traditionally Uses Hard Money Loans?

Historically, the borrowers of hard money loans have been real estate investors and house flippers. When time is of the essence, like needing to buy a distressed property at auction, traditional lending timelines of 30-45 days (or even 14 in our case) won’t cut it. In those cases, investors are willing to pay a premium in exchange for speed and flexibility.

Some common scenarios include:

• Buying a foreclosure or property at auction
• Fix-and-flip investment deals
• Bridge loans between purchase and some
• Short-term hold before refinancing into a long-term loan

But in recent years, hard money loans have been used by individuals for owner-occupied transactions. It’s been seen as a solution by those individuals with damaged credit, self-employed income that’s difficult to document, or unique situations that make conventional financing unavailable. These individuals aren’t investors—they’re everyday homebuyers, the average Joe who don’t necessarily understand the risk of hard money loans. But when denied by traditional lenders, they may feel like hard money is their only option. And while it can be a temporary solution, it often comes at a steep cost.

If you are one of these people, it’s important to understand that you need to come off of a hard money loan as fast as possible to prevent incurring unnecessary costs. Whether that means working with a credit repair company to get your score higher or a mortgage broker to better document your income – everyone who opts for a hard money loan should be able to come off of it and into conventional or non-QM financing with a little work.

What’s the Interest Rate on a Hard Money Loan?

Hard money loans carry much high interest rates than any other real estate loan, usually in the 12%–15% range, and that’s not including upfront fees (called “points”) that can range from 2% to 5% of the loan amount.

Let’s say you’re buying a $400,000 home and borrowing $300,000 through a hard money lender:

• Your rate might be 12%
• You could owe $9,000 in points at closing (3%)
• Your monthly payment would be interest-only—around $3,000/month

This kind of financing is not meant for the long term. It’s designed to be temporary—maybe 6 to 12 months—until the property is sold or refinanced into a more traditional mortgage.

But if rates rise, credit issues persist, or the borrower’s income doesn’t stabilize, refinancing may not be possible. That’s when hard money loans become truly dangerous.

Here’s how hard money loans compare to conventional financing:

Why Hard Money Loans Are Risky for Everyday Homebuyers

For regular individuals buying a primary residence in Austin, Houston, or Dallas, hard money loans should generally be a last resort. Here’s why:

• You’re paying way more than you need to. A 12% rate on a $400,000 loan results in nearly $40,000 in interest in just one year! With conventional mortgage options currently around 6.5%, you’re paying nearly double for a hard money loan.
• There are fewer protections. Hard money lenders aren’t regulated like banks (think pre-2008 lending). You may face balloon payments, aggressive foreclosure timelines, and less oversight.
• They’re not built for long-term ownership. These loans are interest-only and often due in full within 6–12 months. If you can’t refinance or sell, you’re at risk of losing the home.
• They don’t help build credit. Because most hard money lenders don’t report to credit bureaus, timely payments won’t help improve your score.
• There are massive fees involved with hard money loans! It’s not just the rate that’s high—it’s the upfront fees, broker commissions, and other costs that can add up to tens of thousands of dollars quickly.

While they may make sense in a short-term pinch—say, you’re self-employed and need time to document your income because most banks want to see at least 1 year of self-employment income—there are almost always better alternatives.

What Are the Alternatives to Hard Money Loans?

If you're a real estate investor with experience, a clear exit strategy, and a short timeline, a hard money loan can be a legitimate tool. But for everyone else, here are some better options:

• Work with a mortgage broker. A broker can shop across dozens of lenders—including DSCR programs that also rely on just the performance of the property. Self-employed? Just came off a recent credit event? There are still options that don’t involve 12% interest.
• Consider a Non-QM loan. Non-qualified mortgages (non-QM) are designed for borrowers who don’t fit traditional lending boxes. While the rates are higher than conventional loans, they’re far more affordable and stable than hard money loans.
• Partner with a co-borrower or family member. Sometimes adding another income source can help you qualify for conventional financing—even temporarily.

Final Thoughts: Understand the risks a Hard Money Loan

In today’s high-rate environment, the appeal of fast, no-questions-asked financing is understandable, and hard money loans are a good solution for a minority of borrowers. But hard money loans are expensive and risky, and a rarely in a buyer’s long-term interest—especially for primary residences. It’s an added layer of stress that most people don’t want or need.

If you’re feeling stuck, talk to a mortgage broker first. At LendFriend, we specialize in creative financing—but also in avoiding predatory loans whenever possible. Whether you're an investor or just someone trying to buy a home in Austin, Houston, or Dallas, we’ll help you compare the numbers and find a smarter. Give us a call at 512.881.5099 or get in touch with me by completing this quick form, and I'll be in touch as soon as possible.