To become a hard money lender, you form a business entity, confirm what your state requires you to license, stay inside the business-purpose lending lane that keeps you clear of consumer mortgage rules, raise capital in a way that complies with securities law if any of that capital comes from other people, and build an underwriting process centered on the property rather than the borrower. The work splits fairly cleanly into a legal setup phase and an operations phase, and getting the first phase right is what makes the second phase possible.
Decide What You’ll Lend On
Before anything else, decide who your borrowers will be. Hard money loans generally fund investment properties: fix-and-flips, rental acquisitions, and commercial projects. Those are business-purpose loans, and business-purpose loans sit outside most of the federal consumer mortgage regime.
This matters because the moment you make a loan to someone buying or refinancing a home they intend to live in, a very different rulebook opens up. The SAFE Act’s licensing requirements for mortgage loan originators, Regulation Z disclosures, the Ability-to-Repay rule, and RESPA all apply to residential mortgage loans made “primarily for personal, family, or household use” and secured by a dwelling.1GovInfo. 12 USC 5102 – Definitions Regulation Z explicitly exempts credit extended “primarily for a business, commercial or agricultural purpose.”2eCFR. 12 CFR 1026.3 – Exempt Transactions
The practical move most new hard money lenders make is to restrict lending to business-purpose borrowers and require every borrower to sign a business-purpose declaration that goes into the loan file. That single document, backed up by the facts of the transaction, is what keeps you out of the consumer mortgage rulebook.
Set Up the Business Entity
Operate through a formal legal entity. A Limited Liability Company is the standard choice because it separates your personal finances from the lending business, limits personal liability, and offers flexible tax treatment. File the organizational documents with your state, then apply for a federal Employer Identification Number from the IRS, which is free and can be done online.3Internal Revenue Service. Employer Identification Number The IRS advises forming the entity with your state before applying for the EIN, because applying in the wrong order can delay things.4Internal Revenue Service. Get an Employer Identification Number
Run every loan, contract, and dollar of capital flow through the entity’s accounts. Mixing personal money into the lending operation muddies your tax reporting and can undermine the liability shield the entity is supposed to give you.
Anti-Money Laundering Program
FinCEN classifies non-bank mortgage lenders and originators as “loan or finance companies” subject to the Bank Secrecy Act. That means a written anti-money laundering program approved by senior management, plus filing Suspicious Activity Reports when a transaction looks like it may involve illegal activity.5Federal Register. Anti-Money Laundering Program and Suspicious Activity Report Filing Requirements for Residential Mortgage Lenders and Originators Even if your loans are all business-purpose, documenting the source of funds on every deal is a practical necessity, both for regulatory compliance and for keeping your business bank accounts open.
Figure Out Whether You Need a License
Federal licensing under the SAFE Act generally does not apply to hard money lending focused on investment property. The Act requires individuals who originate residential mortgage loans to be state-licensed or federally registered as mortgage loan originators through the NMLS,6eCFR. 12 CFR Part 1008 – SAFE Mortgage Licensing Act and it defines a residential mortgage loan around personal, family, or household use.1GovInfo. 12 USC 5102 – Definitions Business-purpose loans fall outside that definition.
Your state is a separate question. Some states require a mortgage lender license, a finance lender license, or a similar credential for anyone originating loans secured by real property above a certain volume, regardless of whether those loans are for business or consumer purposes. Applications typically involve financial statements, a minimum net worth requirement, background checks, and sometimes pre-licensing education. Minimum net worth thresholds range from around $25,000 to $250,000 or more depending on the license type and whether you employ loan originators.
Operating without a required state license can trigger administrative fines, cease-and-desist orders, and, worst of all, the inability to enforce your loan contracts in court. Check with your state’s financial regulatory agency before you originate your first loan.
Usury Caps
Every state limits how much interest a lender can charge, and the caps vary widely, from roughly 5% up to 36% or more for general loans, with some states imposing no cap at all on business-purpose or large loans. Hard money rates typically run between 8% and 15%, plus origination points of 1% to 4%. Whether that pricing is lawful in your state depends on the exemptions in your usury statute, which often cover business-purpose loans, loans above a certain dollar threshold, or loans made by licensed lenders. Penalties for exceeding the cap can include forfeiture of all interest, treble damages to the borrower, and in some states criminal liability. Confirm which exemption you’re relying on before you set your rates.
Raising Money From Investors
If you’re lending only your own money, securities law is not part of your problem. The moment you accept capital from anyone else, whether through a fund, a loan pool, or deal-by-deal participation, you are almost certainly offering a security and have to comply with federal and state securities regulations.
Most hard money fund managers raise capital through a private placement under Regulation D of the Securities Act, using either Rule 506(b) or Rule 506(c).7eCFR. 17 CFR Part 230 – Regulation D Under 506(b), you can’t use general advertising or solicitation. You can accept up to 35 non-accredited investors, though doing so adds significant disclosure obligations, and you need a reasonable belief that each accredited investor qualifies. Under 506(c), you can advertise the offering publicly, but every investor has to be accredited and you must take reasonable steps to verify that status, such as reviewing tax returns or bank statements or obtaining written confirmation from a CPA or attorney.8U.S. Securities and Exchange Commission. Assessing Accredited Investors Under Regulation D
An individual qualifies as accredited with a net worth over $1,000,000 excluding primary residence, or individual income above $200,000 in each of the two most recent years ($300,000 jointly with a spouse or spousal equivalent) with a reasonable expectation of maintaining that level.7eCFR. 17 CFR Part 230 – Regulation D Securities issued under Regulation D are restricted and can’t be freely resold without registration or another exemption.
One more securities question: a pooled lending vehicle can look like an investment company under the Investment Company Act of 1940, which would trigger extensive SEC registration. The Act excludes entities primarily engaged in “purchasing or otherwise acquiring mortgages and other liens on and interests in real estate,”9Office of the Law Revision Counsel. 15 USC 80a-3 – Definition of Investment Company and a fund that keeps the substantial majority of its assets in whole mortgage loans secured by real property generally qualifies. Structuring this correctly is a job for a securities attorney.
Underwriting a Loan
A hard money loan is a bet on the collateral, so underwriting starts with the property. Get a professional appraisal or broker price opinion for current market value. For renovation projects, require a detailed scope of work covering every planned improvement and its estimated cost, then calculate the After-Repair Value by pulling comparable sales for similar renovated properties in the area.
Two ratios drive the decision. Loan-to-Value compares your loan amount to the property’s current value. Loan-to-ARV compares the loan amount, including any construction holdback, to the projected post-renovation value. Most hard money lenders cap total exposure at 65% to 75% of ARV. That cushion is what lets you recover principal through foreclosure if things go wrong.
Round out the file with the borrower’s experience, project timeline, proof of funds for closing costs and early construction expenses, a signed purchase contract, and proof of hazard insurance naming your lending entity as loss payee.
Title and Environmental
Require a title search and a lender’s title insurance policy on every loan. Title insurance protects you against defects in the chain of title such as unpaid taxes, undisclosed liens, recording errors, or boundary disputes. Without it, a superior claim can surface after closing and wipe out your security interest.
Environmental contamination is less visible and potentially much more expensive. Under CERCLA, property owners can be held liable for cleanup costs, and a lender who forecloses can end up an “owner” in the statute’s eyes. CERCLA provides a secured creditor exemption that protects lenders who hold a security interest without “participating in the management” of the property.10Office of the Law Revision Counsel. 42 USC 9601 – Definitions Monitoring the loan, enforcing covenants, inspecting the property, and restructuring loan terms don’t count as participation in management.11Environmental Protection Agency. CERCLA Lender Liability Exemption – Updated Questions and Answers If you foreclose, you can maintain or liquidate the property and keep the exemption as long as you try to sell at the earliest commercially reasonable time. For any property with industrial or commercial history, order a Phase I environmental assessment before funding.
Closing and Servicing the Loan
Fund through an escrow or title company acting as a neutral third party. The borrower signs a promissory note (the legal evidence of the debt, spelling out interest rate, payment schedule, and maturity) and executes a deed of trust or mortgage that creates the lien on the property. Once the title company confirms documents are signed, title is clear, and insurance is in place, you wire proceeds to the settlement agent for disbursement.
The choice between a deed of trust and a mortgage matters for enforcement. A deed of trust typically includes a power-of-sale clause allowing non-judicial foreclosure, which is faster and cheaper. A mortgage, used in some states, generally requires judicial foreclosure through the court system. Your closing attorney should make sure the security instrument matches the state where the property sits.
On renovation loans, don’t fund the whole construction budget at closing. Release funds in draws as milestones in the scope of work are completed, and send a third-party inspector to verify the work before you authorize each draw. Borrowers typically make monthly interest-only payments, tracked through servicing software or careful manual accounting, with all payments flowing to the entity’s account. When the project sells or refinances, the borrower pays off the remaining principal in full and you record a release of lien to clear the title.
When a Borrower Defaults
Your loan documents should define what triggers a default, what cure period the borrower gets, and what remedies you have. Common triggers are missed payments, lapsed insurance, and failure to complete construction on schedule.
A missed payment typically starts a grace period of 10 to 30 days before the loan enters default status. Once in default, a higher default interest rate and late fees kick in. The borrower can usually cure by bringing the loan current, including penalties and fees.
If the borrower can’t cure, foreclosure is your primary remedy. Non-judicial foreclosure under a deed of trust runs outside the court system and is generally faster; judicial foreclosure under a mortgage runs through the courts. Timelines and procedural requirements vary significantly by state, from roughly 60 days to over a year. During foreclosure, the borrower can still pay off the loan in full or refinance with another lender to stop the process. Build a relationship with a local foreclosure attorney before you fund your first loan so you know the timeline, costs, and procedure in your state and can price the risk accordingly.
Tax Reporting
Interest income from hard money lending is ordinary income, and the IRS requires you to report it to the government and to your borrowers and investors.
- Form 1098. If you receive $600 or more of mortgage interest from an individual borrower in a calendar year in the course of your trade or business, file Form 1098 reporting that interest to the IRS and give a copy to the borrower. The $600 threshold applies separately to each mortgage.12Internal Revenue Service. Instructions for Form 1098
- Form 1099-INT. If you pay $10 or more of interest to investors funding your loans (such as participants in a mortgage pool or fund), file Form 1099-INT. Copies go to recipients by January 31 and to the IRS by February 28 on paper or March 31 electronically.13Internal Revenue Service. About Form 1099-INT, Interest Income14Internal Revenue Service. 2026 Publication 1099 – General Instructions for Certain Information Returns
Origination points collected at closing are income in the year received. If your entity is an LLC taxed as a partnership or S-corporation, the income flows through to members or shareholders on their personal returns. Keep clean records of every interest payment, every fee, and every disbursement across the year; it makes your annual filings straightforward and it makes any future audit survivable.