BOSTON REIA · FINANCING GUIDE
Hard Money Loans: Underwrite the Cash and the Clock
Compare acquisition advances, renovation holdbacks, points and a delayed payoff before committing.
Hard money can fit a Massachusetts purchase that needs repairs, a fast closing or a short period before resale. Its usefulness depends on whether the property can support its entire financing bill and whether you can reach the exit before maturity. A large commitment on a term sheet does not mean that amount arrives at closing.
Build the transaction from dated cash movements: what the seller receives, what the lender advances, what stays in a construction holdback and what you must fund yourself. Treat a verbal promise of speed as an application claim until underwriting, title, insurance, closing instructions and funding are ready.
See the financing exampleUse the calculatorsBuild the financing analysis
Read the advance formula before the rate
Ask for the acquisition advance and the renovation allocation separately. A loan might be constrained by a percentage of purchase cost, total eligible cost and after-repair value at the same time. The smallest permitted amount controls. Confirm whether the lender uses the contract price, its own valuation or the lower of cost and value for each test.
A renovation holdback can increase the headline loan without reducing the cash needed to buy the property. Make a closing statement showing the funded acquisition amount less points, legal charges, escrows and any retained interest. Reconcile that net wire with the purchase balance. A high advertised leverage percentage can coexist with a substantial borrower contribution.
Price the actual holding period
Points are generally expressed as a percentage of a specified loan amount. Ask whether that base is the total commitment or only funded principal. Determine whether interest accrues on outstanding advances, the full commitment or another contractually defined amount. Minimum interest, exit fees and extension charges can change the cost of a quick payoff.
Prepare six-, nine- and twelve-month cost columns using the same draw assumptions. Include inspection charges, wire charges and any renewal expense. Keep a simple all-in dollar comparison separate from a legal APR calculation; they are different measures. For Massachusetts transactions, have counsel assess the full charge structure and applicable usury, licensing and credit-purpose rules. A business-purpose label alone does not settle every requirement.
Fund the interval between work and reimbursement
Ask for a sample draw request and an actual explanation of its approval steps. Establish whether work must be installed before reimbursement, whether stored materials qualify, how inspections are ordered and whether a retainage remains until final completion. Contractor deposits can fall due before any eligible work exists.
Create a week-by-week cash schedule covering the purchase contribution, invoices, interest and inspections. Add a delayed-inspection case rather than assuming reimbursement on the invoice date. Avoid using the same reserve dollars as both proof of liquidity and money already committed to the next construction bill. Confirm the remedy if a contractor stops work or a budget category overruns.
Match a flip exit to net sale proceeds
A resale exit needs a supported selling range, a realistic preparation period and sufficient time for the buyer’s financing. Deduct selling commissions, transfer-related charges, closing costs, remaining work, interest through the anticipated payoff date and any lender exit charge. Gross resale price is not the money available to retire debt.
Use a separate lower-price, longer-hold case. If the loan matures while the listing is active, you need an extension right or another funded solution before that deadline. Do not assume an extension is available because the lender has granted one to another borrower. Identify its fee, notice period, updated valuation tests and default restrictions in the signed documents.
Prove a rental refinance independently
For a hold exit, ask the permanent lender to evaluate the intended property, borrower, entity, completed condition and projected rents before you accept short-term debt. Request its valuation basis, ownership or mortgage timing rules, reserve conditions and treatment of cash-out proceeds. Short-term approval does not establish permanent loan eligibility.
Calculate permanent proceeds after payoff, refinance fees and escrows. A lower appraisal may leave you writing another check even when renovations are complete. Then test the rental with the permanent payment, realistic vacancy, operating expenses and replacement reserves. If the refinance closes but the rental loses cash, the financing has only moved the problem into a longer term.
Close with control over execution
Assign responsibility for title issues, insurance changes, utilities, permits and contractor access. A vacant or actively renovated property may require coverage different from an occupied rental. Confirm the lender’s insurance requirements early enough to price them and avoid a last-minute funding condition.
Review guarantees and pledged collateral with counsel, including assets beyond this project. Ask who services the loan, approves draws and provides payoff statements after any assignment. Keep a dated maturity and extension calendar. The useful question is whether your team can carry out these specific obligations with the liquidity available, not whether another investor has used hard money successfully.
Worked financing example: An acquisition-and-rehab commitment with a nine-month hold
Hypothetical teaching assumptions only. These are not current rates, lender offers, approval standards or promised results. Figures are before income taxes unless stated and do not model every transaction cost.
| Item | Illustrative figure | Interpretation |
|---|---|---|
| Purchase / renovation budget | $400,000 / $80,000 | Purchase and work are separate uses. |
| Acquisition advance / rehab holdback | $320,000 / $80,000 | The $400,000 commitment initially funds only $320,000. |
| Points / other closing costs | $8,000 / $12,000 | Assume 2 points on total commitment, paid separately. |
| Initial borrower cash | $100,000 | Purchase gap $80,000 + $20,000 points and closing costs; excludes reserves. |
| Nine-month interest | $27,000 | Assume 10% simple annual interest on a $360,000 average outstanding balance. |
| Three-month delay + extension | $14,000 | Assume $10,000 more interest at $400,000 outstanding plus a $4,000 extension fee. |
Under these simplified assumptions the nine-month financing charges are $35,000: $8,000 points plus $27,000 interest, excluding the other closing costs and draw charges. The delayed case raises them to $49,000. These are dollar costs, not an APR, and the average-balance assumption must be replaced with an actual advance schedule.
The $100,000 initial contribution is not the peak cash requirement. Add invoices awaiting reimbursement, operating bills and the funded delay reserve. Recalculate project profit after those financing charges, and obtain a written payoff quote before an actual closing.
Calculators for this financing decision
Keep the same assumptions across tools. Check each tool’s definitions and reconcile omitted costs in your own worksheet. A calculation does not establish approval or program eligibility.
Prepare the financing file
Documents and decisions before commitment
- Acquisition advance calculation and valuation supporting every leverage cap.
- Closing wire reconciliation, points base and itemized fee schedule.
- Approved rehab budget, contractor agreement and sample draw package.
- Weekly cash forecast with reimbursement delays and separate reserves.
- Signed maturity, extension, prepayment and guaranty provisions.
- Documented sale or permanent-loan exit plus lower-value backup.
Financing questions
Does 100% rehab financing mean no money for construction?
No. It can mean the approved work is reimbursable only after installation and inspection. Deposits, excluded work, retainage and delayed draws can still require substantial borrower cash. Ask when each dollar can actually be released.
Is the lowest rate the least expensive loan?
Compare points, funded balances, minimum interest, draw charges and payoff timing. A lower rate with more upfront fees may cost more during your planned hold. Run a delayed exit as well as the expected case.
Can I count on refinancing when the work is done?
Only after checking permanent underwriting separately. Accepted value, eligible rents, timing rules, credit, reserves and property condition can all constrain proceeds. Establish the cash needed if the approved refinance is smaller than the outstanding payoff.
Primary sources and program references
Official sources support the legal and program framework. The cash-flow examples, comparison workflows and operating judgments are Boston REIA educational analysis. Verify current requirements and obtain transaction-specific advice.
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