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.

KEY TAKEAWAYS

• Hard money loans are primarily used for real estate transactions.
• They are generally money from an individual or company, and not a bank.
• A hard money loan is a way to raise money quickly but at a higher cost.
• 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. 

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.

Special Considerations for Hard Money Loans

The cost of a hard money loan to the borrower is typically higher than financing available through banks or government lending programs, reflecting the higher risk that the lender is taking by offering the financing. However, the increased expense is a tradeoff for faster access to capital, a less stringent approval process, and potential flexibility in the repayment schedule.