9 Clauses Every Lender Should Include in Hard Money Loan Documents

In the world of hard money lending, speed and flexibility set you apart from traditional banks. Investors turn to you for quick closings, asset-based lending, and creative financing structures that traditional institutions won’t touch. But with that flexibility comes risk—and your best line of defense is what’s written in your loan documents.

A lender funds a $300,000 fix-and-flip with weak loan documents. The borrower lets insurance lapse, misses taxes, and a fire damages the property. With no clear default clauses, the borrower claims they’re not in default since payments continue. Instead of a quick foreclosure, the lender faces months of costly litigation—all because the documents weren’t airtight.

The right clauses not only protect your investment but also ensure you have enforceable remedies if the borrower defaults. Having a strong set of documents, ideally drafted by a hard money lawyer, is critical to the long-term success of your lending business.

Here are the key clauses every hard money lender should include in their agreements.

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1. Loan Amount, Interest Rate, and Repayment Terms

Start with the basics, but make them airtight. Your documents should clearly specify:

• Principal loan amount
• Interest rate and whether it’s fixed or variable
• Repayment schedule (monthly interest-only payments are common in hard money lending)
• Maturity date and any balloon payments

Clarity prevents disputes. A hard money lawyer can ensure the terms are enforceable under state lending laws and structured to protect your returns.

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2. Collateral Description

Hard money lending is secured lending. The property is your safeguard, and your loan documents should:

• Precisely describe the property (address, parcel number, legal description)
• Identify additional collateral, if required
• Include conditions for rehabs or construction projects such as Construction Draw procedures

The more detailed the collateral description, the easier it is to enforce your lien if you need to foreclose.

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3. Default Provisions

Default provisions are the backbone of lender protection. Beyond missed payments, you should define default to include:

• Failure to maintain property insurance
• Nonpayment of property taxes
• Unauthorized property alterations or sales
• Borrower bankruptcy
• Violations of loan covenants

These triggers allow you to take swift action before your collateral is at risk.

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4. Prepayment and Exit Strategy

From the lender’s perspective, early payoff can mean lost interest income. Your loan documents should address:

• Whether prepayment is allowed
• Any required prepayment penalties or minimum interest guarantees
• The borrower’s stated exit strategy (sale, refinance, etc.)

By structuring clear prepayment provisions, you secure your expected return while still giving the borrower flexibility.

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5. Fees and Costs

Hard money lending often involves fees beyond interest. To protect your profitability, clearly outline:

• Origination fees or “points”
• Underwritting Fees
• Servicing or administrative fees
• Appraisal Costs
• Late payment penalties
• Legal and collection costs recoverable from the borrower

Ambiguity around fees can lead to disputes—or worse, regulatory issues.

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6. Insurance and Property Maintenance Requirements

Since the property is your collateral, you want to keep it protected. Your documents should require the borrower to:

• Carry hazard insurance (with you named as loss payee)
• Maintain builder’s risk coverage for rehab projects
• Keep the property in good condition, free of code violations

These clauses give you the right to step in or even force-place insurance if the borrower fails to comply, ensuring your collateral remains secure.

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7. Personal Guarantees

Depending on the borrower’s experience or financial strength, a personal guarantee may be appropriate. This allows you to pursue the borrower’s personal assets if the property value falls short of covering the loan balance.

While not always necessary for seasoned investors, guarantees can provide critical protection for first-time borrowers or higher-risk projects. Have a hard money attorney draft these carefully to withstand enforcement challenges.

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8. Assignment of Rents

If you’re lending against rental property, an “assignment of rents” clause is invaluable. It gives you the right to collect rent directly from tenants if the borrower defaults.

This ensures ongoing cash flow during foreclosure proceedings and reduces your risk exposure. Be sure the clause complies with state laws on tenant rights and lender remedies.

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9. Foreclosure and Remedies

Perhaps the most important section for a lender is the remedies available in default. Your documents should:

• Specify whether foreclosure will proceed judicially or non-judicially (depending on your state)
• Allow recovery of attorney’s fees and costs
• Preserve rights to pursue deficiency judgments if permitted by law

With the right knowledge and the right team, you can use hard money lemding as a smart strategic tool for investing success.