A hard money loan is an often used term but most people are not 100% sure about what this term really means. With the many different definitions floating around it is hard to know which one is right.
A hard money loan is different from a bank loan because the person taking this loan usually does not have any collateral and is a high risk customer. This is why they are not eligible for a bank loan and are forced to find a hard money loan. The money is usually loaned from a private business or investor. This loan is given based on their property value, as this is given as their one and only collateral, taking into account the borrower’s inability or willingness to pay back this loan. A hard money loan normally has an extremely high interest rate but lower Loan to Value Ratios.
Hard money loans are almost always a last resort for the borrower. Finding a hard money lender is not an easy task unless you are desperately searching for one like most of their customers are. Their customers have already been turned down by the bank because of bad credit or other financial problems, now their only chance is to select this method of funding.
It is important to be clear that hard money lenders are not like loan sharks or other black market lending. This is a legitimate way to retrieve a loan if you are in dire need. They do look at their clients and their property to ensure that in the event that the customer cannot pay the loan, their homes and property possess enough value that the lenders can make a profit when they foreclose it.
People and businesses who buy expensive properties and who already own such homes and want to cash out large amounts of their equity via refinance loans also turn to private money. Real estate investors also use these forms of financing to avoid the terms and conditions of any bank loan. These buyers purchase properties for almost nothing, fix them up and sell them for profit. They use private loans because the loans come with less red tape and restrictions than bank loans.
Hard money loans have many different types of borrowers and lenders. It is a growing industry.