What Is a Hard Money Loan?
A hard money loan is a type of loan that is secured by real property. Hard money loans are considered loans of “last resort” or short-term bridge loans. These loans are primarily used in real estate transactions, with the lender generally being individuals or companies and not banks.
- Hard money loans are primarily used for real estate transactions and are money from an individual or company and not a bank.
- A hard money loan, usually taken out for a short time, is a way to raise money quickly but at a higher cost and lower LTV ratio.
- Because hard money loans rely on collateral rather than the financial position of the applicant, the funding time frame is shorter.
- Terms of hard money loans can often be negotiated between the lender and the borrower. These loans typically use property as collateral.
- Default by the borrower can still result in a profitable transaction for the lender through collecting the collateral.
How a Hard Money Loan Works
Hard money loans have terms based mainly on the value of the property being used as collateral, not on the creditworthiness of the borrower. Since traditional lenders, such as banks, do not make hard money loans, hard money lenders are often private individuals or companies that see value in this type of potentially risky venture.
Hard money loans may be sought by property flippers who plan to renovate and resell the real estate that is used as collateral for the financing—often within one year, if not sooner. The higher cost of a hard money loan is offset by the fact that the borrower intends to pay off the loan relatively quickly—most hard money loans are for one to three years—and some of the other advantages they offer.