What is a Hard Money Loan?
A hard money loan is a specific type of asset-based/equity-driven loan financing, in which a borrower receives funds that are secured by a peice of property that is either owned or financed. Hard money loans are typically issued at a much higher interest rate than conventional commercial or residential property loans. Hard Money loans are almost never issued by a commercial bank or other deposit instituation, largely because a majority of a banks criteria for a loan is dependent on an individual's credit score. Hard money is similar to a bridge loan, which will usually have similar criteria for lending as well as the interest rate borrowers are to pay.
The primary difference between these two types of loans is that a bridge loan is often referring to a commerical property or investment property that may be in transition and does not qualify for traditional financing, whereas a hard money loan often refers to not only an equity-based loan with a high interest rate, but possibly a distressed financial situation, such as foreclosure on a home or bankruptcy.
Many hard money mortgages are made by private investors, generally in their local areas. Usually the credit score of the borrower is not important, as the loan is secured by the value of the collateral property. Typically, the maximum loan-to-value ratio is 65-70%. That is, if the property is worth $100,000, the lender would advance $65,000-70,000 against it. This low LTV provides added security for the lender, in case the borrower does not pay and they have to foreclose on the property.