Hard Money Loan Structures and Term Sheets

A hard money term sheet specifies the loan amount, interest rate (typically quoted as an annual rate but paid monthly), origination points, term length, extension options, prepayment provisions, draw schedules for rehab funds, reserve requirements, and default/foreclosure provisions. Unlike conventional mortgages with standardized documents, hard money terms vary dramatically between lenders—a difference of 2 points and 2% in rate on a $200,000 loan translates to $4,000 in upfront cost and $4,000/year in interest, significantly affecting project profitability.

Hard money loans typically use one of three interest structures: monthly interest-only payments (most common), interest reserves where the lender withholds months of interest from the loan proceeds at closing, or deferred interest where all interest accrues and is paid at maturity. Monthly interest-only is simplest: on a $200,000 loan at 12%, the monthly payment is $200,000 × 0.12 / 12 = $2,000. Interest reserves are common for fix-and-flip loans where the property generates no income during renovation—the lender holds back 6-12 months of payments. Deferred interest is rare and expensive but eliminates carrying costs during renovation.

For fix-and-flip loans that include rehab funding, lenders release renovation funds through a draw schedule—typically in 3-5 draws tied to construction milestones. The borrower completes a phase of work, requests an inspection, and the lender releases the next draw after verification. Common draw structures include percentage-of-completion (draws based on % of total scope completed), milestone-based (draws at predefined project stages), and front-loaded draws (larger initial draw, smaller subsequent draws). A 10% holdback is common—the lender retains 10% of total rehab funds until all work is completed and a final inspection is passed.