Transactional Funding vs. Hard Money Lending: What’s Your Best Option?

You usually have two major options when you need cash for a real estate deal. Transactional funding and hard money loans both get you funded fast, but they couldn’t be more different in how they actually work. One gets you in and out in 48 hours; the other gives you a year or two to complete your project.

Most buyers stumble into these loans without really getting what makes them tick. That’s a problem because picking the wrong one can significantly impact your margins or, worse, kill the deal entirely. Here’s what each one actually does and when you’d want to use them.

What is Transactional Funding?

Transactional funding is a blink-and-you-miss-it loan. You get funded in hours to buy the property. You then flip it to your end buyer within days and pay back the loan all in the same week.

The lender covers 100% of the purchase price because they know your buyer is already locked in with proof of funds.

This isn’t for fixing up properties or holding them. You’re just the middle person, facilitating the transfer of a property from seller to buyer extremely quickly. Some people call it flash funding or same-day funding, but it’s essentially the same thing: money you borrow for a maximum of 72 hours.

The fees run 2% to 12% of the loan amount, and you’re only paying for a few days of capital.

What Are Hard Money Loans

Hard money loans give you actual time to work with a property. Perhaps six months to two years, which is enough time to buy something in need of renovation, fix it up, and sell it for a profit.

These loans come from private lenders who care way more about the property value than your credit score.

They’ll typically fund 65% to 75% of the after-repair value, so you’ll need to bring a down payment of 10% to 30%. The interest rates are usually 10% to 18% annually, plus points upfront.

Yes, it’s more expensive compared to a regular mortgage, but you’ll be funded in a week instead of waiting two months through a bank.

What Are the Major Differences Between Transactional Funding and Hard Money Lending?

Alright, let’s get specific about what actually separates these two. The differences between transactional funding and hard money lending aren’t subtle, and they matter a lot when you’re deciding which one to go with.

Loan Term and Duration

Transactional funding is completed within one to five business days. You close on the property, your buyer closes right after, and the loan gets paid back before the week ends.

Hard money loans stretch from six months to two years because you actually need time to renovate the property and find a buyer.

Interest Rates and Costs

Transactional funding charges a flat fee of 2% to 12% on the loan amount; however, remember that you’re only borrowing for a short period. Hard money loans typically require an annual interest rate of 10% to 18% plus 3% to 5% in upfront points.

The annual rate sounds high, but most investors close these deals in under a year, so you’re not paying the full year’s interest anyway.

Approval Process and Requirements

Getting transactional funding approved can take hours if you have your end buyer locked in with proof of funds. That’s basically all the lender wants to see.

Hard money lenders really analyze property value, your renovation plans, and the after-repair value. This means approval takes a few days to a week. Still way faster than a bank, but not same-day fast.

Loan-to-Value Ratios

Transactional funding covers 100% of the purchase price because the lender knows your buyer is ready to close immediately.

Hard money loans fund 65% to 75% of the after-repair value, which means you’re putting down 10% to 30% of your own cash. The lender wants you to have a financial stake, as you will be holding the property for several months.

When to Choose Transactional Funding

Transactional funding is for when you’ve already got your ducks in a row and you just need to be the person in the middle making it happen. Here are some situations when this is exactly what you need.

Real Estate Wholesaling Scenarios

Traditional funding is suggested when you have a deal under contract, but the seller’s not cool with assignment, or your state makes it a headache. You can use transactional funding with this one because you can actually buy the property yourself and flip it to your buyer without draining your bank account.

Many wholesalers rely on this when they are unable to assign the contract. This is also used when sellers become wary about the whole wholesaling process and want to deal with a genuine buyer.

Quick Property Flips

Every once in a while, you stumble on a property that’s already in decent shape but priced way below what it should be. Your buyer wants it exactly as it is, and they’re ready to close this week. You don’t need six months to gut the place; you just need cash right now to snag the deal before your competition does.

Secure transactional funding, as the entire process will be completed before the weekend is over.

When Hard Money Loans Make More Sense

You want hard money when the property needs actual work, or you’re planning to hold onto it for a bit. Essentially, anytime you’re not passing the property along to someone else within 48 hours.

Property Renovation Projects

Let’s say you picked up a fixer-upper that needs all new kitchens, bathrooms, flooring, maybe even some structural stuff. That kind of work takes months, not days. You need a loan that gives you breathing room.

Hard money loans are designed for this purpose, as you have six months to two years to hire your contractors and address permit delays. You also need to manage the whole renovation process and get the place looking good enough to sell.

You can’t pull that off with transactional funding since you’d run out of time before your first contractor even walked through the door.

Long-Term Real Estate Investments

Hard money is also used when buying a rental property that requires updates or when tackling a major flip that will take a significant amount of construction time.

Ultimately, hard money works well for these longer wait times, where you’re holding the property for an extended period. Some investors take out these loans, knowing they’ll refinance into a regular mortgage later, once the property’s generating steady income and everything’s in order.

Cost Comparison of Transactional Funding and Hard Money Loans

Okay, let’s get into what you’re actually paying because at the end of the day, that’s what decides if a deal makes sense or not. These two financing options hit your wallet in completely different ways.

Interest Rates

Transactional funding doesn’t affect traditional interest rates; they just charge you a flat fee that’s usually between 2% to 12% of whatever you borrowed. That’s your total cost since you’re only holding the money for a few days anyway.

Hard money loans function similarly to traditional loans, with annual interest rates ranging from 10% to 18%. However, most people aren’t keeping these loans for a full year, so you end up paying way less than what those scary percentages suggest. If you close your deal within six months, you’ll only pay half the annual rate.

Origination Fees and Points

With transactional funding, you’re looking at origination fees of around 1% to 3%, which is essentially the entire fee structure. Hard money lenders operate differently because they charge points up front. This is 3% to 5% of your total loan amount, and then they’ve got their origination fees on top of that.

So let’s say you’re borrowing $300,000 and your lender charges 4 points, you’re handing over $12,000 before you even get the keys.

It stings a bit, but you’re buying yourself months to actually work on the property instead of racing against a 72-hour clock.

Hidden Costs to Consider

Both of these loans come with additional fees that can come as a surprise. Transactional funding typically incurs processing fees of around $1,000, which cover the costs of attorneys who review all the paperwork and ensure everything’s legitimate.

Meanwhile, hard money loans can pile on appraisal fees, inspection costs, and title insurance. Sometimes, they’ll even charge you penalties if you pay off the loan early, which is kind of annoying when you think about it.

Some lenders add monthly servicing fees or require you to maintain a cash reserve. The best move is to request a detailed breakdown of every cost before committing to anything.

How to Qualify for Transactional Funding

Getting approved for transactional funding is usually easy, as long as you have your buyer lined up and ready to go. The whole process is significantly less stressful than dealing with traditional banks.

Required Documentation

You will need a signed purchase contract with your seller and another signed contract with your end buyer, proving they’re actually committed to closing. The lender’s going to want proof of funds from that buyer. This may be a bank statement or a pre-approval letter showing they’ve got the cash ready.

Beyond that, it’s just basic information, such as the property address, what you’re paying, and what you’re selling it for, so the lender can see that you’re making a decent profit.

End Buyer Requirements

Your end buyer needs to be fully committed and ready to close immediately, not just someone who mentioned they might be interested. The lender requires proof that the buyer has their funds completely ready to proceed, whether that’s cash in their account or a solid approval from their own lender.

Most transactional funding lenders expect your buyer to close within one to five days after you buy the property. If there’s any delay on their end or their funding appears shaky, you won’t receive funding.

How to Qualify for a Hard Money Loan

Hard money loan approval requires a bit more effort than transactional funding, but it’s still significantly easier than dealing with a traditional bank. Lenders mainly want to see that the property has good bones and that you’re not completely winging it with your plan.

Credit Score and Financial Requirements

Your credit score does matter a little bit here, but not in the way banks make it seem. Most hard money lenders are cool with anything above 600, and some will even work with lower scores if your deal looks really solid.

They’re mostly checking to ensure you’re not currently in bankruptcy or have had a recent foreclosure. They might also request bank statements to verify that you can cover the down payment and have a sufficient financial cushion for unexpected costs.

Property Valuation and After-Repair Value

Since the property is essentially the hard money lender’s insurance policy in the event things go south, expect them to hire an appraiser to determine its current value. They will review your renovation plan to determine if your after-repair value is actually justified.

They want to see real numbers backed by actual comps in the area. They usually cap their loan at 75% of that ARV just to protect themselves.

Pros and Cons of Transactional Funding

Transactional funding can totally save your butt on the right deals, but it’s got some serious limitations you need to know about upfront.

Pros of Transactional Funding:

• You get 100% financing, so you’re not draining your own cash reserves.
• Approval happens in hours, not weeks or months.
• Your credit score basically doesn’t matter at all.
• The loan is repaid in a short period, so you’re not burdened with long-term debt.
• You can close on deals even when all your money is tied up elsewhere.

Cons of Transactional Funding:

• Fees are quite substantial, ranging from 2% to 12% of the loan amount.
• You need to have a confirmed buyer with proof of funds before you start.
• You need to close in only one to five days.
• You can’t do any repairs or renovations because there’s literally no time.
• If anything goes wrong with either transaction, the whole deal falls apart

Pros and Cons of Hard Money Loans

Hard money loans give you significantly more flexibility and allow you to actually do something with the property. However, you’re paying for that flexibility in more ways than one.

Pros of Hard Money Loans:

• You get six months to two years to work on the property at your own pace.
• Credit score doesn’t have to be perfect; lenders care more about the deal.
• Closing occurs in about a week, rather than waiting forever, unlike banks.
• Some lenders will finance your renovation costs in addition to the purchase price.
• You can tackle serious projects that genuinely require time and effort.

Cons of Hard Money Loans:

• Interest rates are roughly 10% to 18% annually, plus those upfront points.
• You need a real down payment of 10% to 30% of the purchase price.
• Loan-to-value caps out around 75% of ARV, so you’re bringing more cash.
• If your project drags on or the market tanks, you’re wasting interest every month.
• Prepayment penalties can be particularly painful if you close the deal sooner than expected.

Alternatives to Transactional Funding and Money Loan Options

Transactional funding and hard money loans aren’t your only options when you need money for a deal. There are a few other routes that might work better, depending on your current situation.

Traditional Bank Loans

Traditional bank loans are the slowest option, but they’ve got the best interest rates. This is usually around 6% to 8% for investment properties.

The catch is you’re waiting 30 to 50 days to close. Your credit also needs to be fairly good, and banks typically require tax returns, W-2s, and a comprehensive overview of your entire financial life.

If you have the time and your finances are in order, this can save you a significant amount on interest; however, if you need to close in a week, it’s not feasible.

Private Money Lenders

Private money lenders are individuals with cash who want to invest in real estate deals. They’re way more flexible than banks or even hard money lenders.

The interest rates typically range from 8% to 15%, which falls somewhere between traditional loans and hard money. They can also close in a week or two, depending on how well you know them.

The best part is that you can often negotiate custom terms that work for both of you (e.g., interest-only payments or longer timelines), but you have to find these people first through networking or real estate groups.

Home Equity Lines of Credit

If you own a primary residence with equity, a HELOC allows you to borrow against that equity at relatively low rates, typically ranging from 7% to 10%. You can access the money whenever you need it, repay it, and use it again. It’s super flexible for doing multiple deals.

The downside is you’re putting your own home on the line. That means if a deal goes bad, you could lose your house. Some people are simply not comfortable with that level of risk, even if the rates are better.

Key Takeaways: Transactional Funding vs. Hard Money Lending

Transactional funding is ideal when you have a buyer ready to close in a matter of days and need 100% financing to bridge the gap. Hard money loans are for when you need months to renovate, and you’re cool with putting down 10% to 30% plus paying higher interest for that extra time.

Utilize transactional funding for quick wholesale flips where the property is sold as-is. Use hard money when you’re undertaking actual renovations or holding properties for longer periods. If you need transactional funding that doesn’t mess around, KP Close funds over 15 deals every month and actually understands what wholesalers need. Contact us at (843) 823-1148 and get your deal funded fast.