A hard money loan is a high-risk, high-yield financing option in which a borrower secures the funds with real property. Hard money lenders are typically located only within the U.S. and Canada.
Costs and benefits of a hard money loan
Like bridge loans, hard money loans are short-term and come with high-interest rates. Still, there are differences. Bridge loans often tend to fund commercial property projects until permanent financing becomes available. Hard money loans, on the other hand, serve as notes of last resort to finance projects in distress. Borrowers might be in arrears on their existing mortgages, or facing bankruptcy or foreclosure. This is a key competitive advantage that hard money lenders have over traditional banks – they will underwrite a loan for a borrower that would otherwise have no other financing options.
Private investors, rather than banks, issue hard money loans. These individuals or small firms often rely on a loan-to-value (LTV) ratio to determine how much of an investment they’re willing to make. Hard money loans, though, tend to have an LTV no higher than 80% and can be quite lower.
Interest rates could be as high as 18% but, even so, fast approvals and less paperwork have kept borrowers coming back to hard money lenders. This convenience offered by hard money lenders is also further justification for the higher interest rates.
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