Questions to Ask Hard Money Lenders Before Signing a Term Sheet
For real estate investors vetting a hard money lender before signing a term sheet. These 20 questions surface the true cost of the loan, how rehab draws really work, and what happens if your exit slips.
The questions
Open any question for the note
Are you a direct lender deploying your own capital, or do you place loans with an outside funding source?
Why ask it
Brokers and table funders often present themselves as direct lenders, then add a layer of points and a second underwriting pass you did not budget for. A true balance sheet lender can commit on the spot, so the answer tells you how much of the timeline is actually in their control.
What property types, markets, and loan sizes do you actually fund?
Why ask it
Websites advertise a much wider box than the credit committee approves. Asking for real parameters, including their minimum and maximum loan amount and any counties they avoid, saves you from a two week underwriting detour that ends in a decline.
Which programs do you offer: fix and flip, ground up construction, bridge, or long term rental financing?
Why ask it
A lender who only does 12 month flip paper cannot take you out at the end, which means a second lender search mid project. If they offer both the bridge and the refinance, you can line up your exit with the same underwriter from day one.
What is the interest rate and how many origination points, and what specifically moves a borrower to the low end of your range?
Why ask it
Advertised pricing is almost always the best case tier. Making them name the levers, whether that is experience count, leverage, credit score, or liquidity, tells you whether you can price better on this deal or on the next one.
Do you lend against purchase price, total project cost, or after repair value, and what is your maximum on each?
Why ask it
A lender at 90 percent of purchase plus 100 percent of rehab, capped at 70 percent of ARV, is a completely different deal from one advertising 75 percent LTV. The binding constraint is usually the ARV cap, and that is the number that decides how much cash you bring.
What is my total cash to close, and can I see every fee itemized, including anything charged during the loan and again at payoff?
Why ask it
Origination points are the visible cost. Doc prep, underwriting, processing, wire, legal review, monthly servicing, draw inspection, and exit fees are where a nine percent loan quietly becomes a thirteen percent loan. A written itemization is the only way to compare lenders honestly.
What is the term length, are payments interest only, and do you charge interest on rehab funds I have not drawn yet?
Why ask it
Charging interest on the full loan amount from day one, sometimes called dutch interest, can add thousands on a heavy rehab where funds sit undrawn for months. Ask whether interest accrues on the outstanding balance or the committed balance.
Is there a minimum interest guarantee, a prepayment penalty, or an exit fee if I sell early?
Why ask it
Many hard money notes carry a three to six month minimum interest provision, so a flip that sells in 75 days still owes for the full period. If your business plan is a fast cosmetic turn, this single clause can outweigh a half point difference in rate.
Walk me through the draw process: what do I submit, who inspects, and how many business days from request to funds in my account?
Why ask it
Draw speed determines whether your contractor keeps working or walks off. A lender who inspects by uploaded photos and funds in 48 hours is worth more than one a point cheaper who sends a third party inspector and takes ten days.
Will you fund any portion of the rehab at closing, or is every dollar reimbursement after the work is complete?
Why ask it
Pure reimbursement means you float the first phase of construction out of pocket, which is a real working capital requirement most first time borrowers miss. Knowing this changes how much cash you need to keep in reserve before you start.
How do you determine value: a full appraisal, a broker price opinion, or internal underwriting, and who pays for it?
Why ask it
The valuation method drives both your timeline and your leverage, since a conservative appraised ARV shrinks your loan. Also ask whether the fee is refundable if they decline the file after ordering it.
What liquidity and reserves do you require me to document, and do you hold back an interest reserve at closing?
Why ask it
Some lenders want three to six months of payments verified in your account, and others escrow that interest out of your loan proceeds, which reduces the cash you actually receive. Both affect the deal, and only one shows up on the rate sheet.
How do you define borrower experience, and how does my track record change my pricing or leverage?
Why ask it
Lenders count experience differently: some require deeds in your name, some accept partnerships or projects run for someone else, some only count the last 24 or 36 months. Knowing their definition tells you what documentation to gather and what tier you can argue for.
Is this loan full recourse, will you require a personal guarantee, and do you cross collateralize other properties I own?
Why ask it
A personal guarantee puts assets outside the deal at risk, and cross collateralization can tie up a performing rental to secure a struggling flip. This is the clause investors regret most when a project goes long.
What are your extension terms: how many extensions, what does each cost, and is approval automatic or case by case?
Why ask it
Most flips run longer than planned, so extension mechanics are not a hypothetical. A written option for two three month extensions at half a point each is far safer than a lender who says they usually work with people.
How often do your final terms differ from the initial term sheet, and what typically causes that change?
Why ask it
Retrading at the closing table, usually blamed on the appraisal or a title issue, is common in this space and leaves you with no time to shop. A lender who names their actual causes and frequency is telling you something a testimonial page never will.
What percentage of the term sheets you issue actually fund, and what is your genuine average days to close?
Why ask it
Everyone advertises ten day closings. The pull through rate and the average, not the best case, tell you whether you can safely sign a purchase contract with a short financing window or need to negotiate more time.
Do you service the loan in house or sell the note, and who will I be dealing with in month six?
Why ask it
The relationship you built during origination is worthless if the note is sold to a servicer with no discretion on draws or extensions. Ask specifically whether the buyer of the note can change how flexibly your loan is administered.
Can I speak with three borrowers who closed with you in the last six months, including one whose project did not go to plan?
Why ask it
Happy references are easy to produce and tell you nothing about the downside. How a lender behaved when a rehab blew its budget is the only real evidence of how they will treat you when yours does.
If I miss a payment or cannot pay off at maturity, what is your default rate, cure period, and foreclosure timeline in this state, and what workouts have you actually done?
Why ask it
Default interest of 18 to 24 percent plus late fees can consume your entire projected profit in a few months. Asking about workouts they have genuinely completed separates lenders who want the loan repaid from ones who would rather take the property.
How to Vet a Hard Money Lender
Practical guidance for the conversation itself
Before You Get on the Phone
Package the Deal First
Have the address, purchase price, a line item rehab budget, your comps and ARV, and your exit plan in one document. Lenders quote sharper terms for borrowers who sound like they have done this before, and a vague deal invites a defensive quote.
Know Your Own Break Even
Calculate the maximum all in borrowing cost your deal can absorb before you hear a number. Otherwise you will anchor to whatever the first lender says instead of to what the project can actually carry.
Talk to Three Lenders, Not One
Pricing in hard money varies widely on identical files, and the differences show up in points and draw terms more than in the headline rate. Three term sheets also give you leverage to ask a preferred lender to match a specific line item.
Get a Proof of Funds Letter Early
Most lenders will issue one before full underwriting, and you need it to make credible offers. Ask whether their letter names them as the funding source, since some sellers reject letters from brokers.
Numbers to Extract So You Can Compare Term Sheets Fairly
- Total dollars of interest over your realistic hold, not the annual rate
- Origination points plus every flat fee, added into one closing number
- Maximum loan as a percent of ARV, since this usually binds before LTV does
- Cash required at closing, including any interest reserve held back
- Out of pocket rehab you must float before the first draw reimburses
- Days from draw request to funds received, and the fee per draw
- Minimum interest or prepayment cost if you sell in under 90 days
- Cost and number of available extensions, in writing
- Exit or payoff fees charged at the end of the loan
Red Flags in the Conversation
Upfront Fees Before a Written Term Sheet
Legitimate lenders charge for appraisals and third party reports, typically after issuing terms. A large application, commitment, or advance fee collected before you have anything in writing is the oldest pattern in advance fee fraud.
Dodging the Direct Lender Question
If someone will not say plainly whose capital funds the loan, assume there is a broker layer and ask what they are being paid. That layer is not automatically bad, but you should know it exists before you rely on their timeline.
No Written Draw Schedule
A verbal promise that draws are quick is not a term. Without a documented schedule, inspection method, and turnaround commitment, your construction cash flow depends entirely on someone's mood that week.
Vagueness About Extensions and Default
Lenders who redirect these questions with reassurance rather than mechanics are the ones whose documents you should read hardest. The note governs, not the phone call, so make them point to the clause.
No Verifiable License or Track Record
Check the NMLS registry and your state regulator, and confirm the entity name on the term sheet matches the licensed entity. A lender who cannot name recent closed deals in your market is learning on your project.
Get These in Writing Before You Wire Earnest Money
- A term sheet naming the funding entity, rate, points, term, and all fees
- The exact loan amount and the ARV or cost cap that produced it
- The draw schedule, inspection method, and funding turnaround in business days
- Extension rights, cost per extension, and whether approval is discretionary
- Prepayment, minimum interest, and exit fee language
- Default interest rate, late fee, and cure period from the note itself
- Whether the loan is recourse and what collateral secures it
- Which conditions remain outstanding and what could still change the terms