A hard money loan is a loan given based on the asset given as collateral, usually a real estate property. They are also known by other names, such as private money loans, bridge loans, short-term loans, transitional loans, or asset-based loans.
Many private investors who seek a return on their capital would make hard money loans. They can either be one individual, a group of investors who each invest an amount to your loan, or a group of private investors with a ready-to-use pool of funds managed by an asset manager or loan broker.
Sometimes a borrower needs funds fast, such as when the borrower is competing with other parties in obtaining a certain properties. Other times, they are unable to fulfill certain requirements to qualify for a traditional bank loan. Either way, a borrower needs to keep in mind that hard money loans come at a higher cost, namely a higher interest, and a shorter lending period. Therefore, many borrowers use hard money loans mainly as a bridge loan – or a temporary loan until such time when they are able to obtain loans from traditional banks, and with it pay off their hard money loans.
You can always try to get a traditional bank loan. However, in general, traditional bank loans require a strong collateral as well as excellent credit score and cash flow. Furthermore, in cases where you need funds fast, banks are generally unable to make loan decisions and provide funds in a speedy manner. Hard money lenders are the exact opposite. They are flexible in their requirements, focus on the collateral for the loan, and are able to provide a loan quickly.
Unfortunately this negative stigma linked to hard money lenders is a result of a few bad apples in the industry. Over time, the business has evolved and many good lenders are available, serving real estate investors and closing good deals. If you’re in the market for a hard money loan, you need to know the right questions to ask potential lenders to be sure you are dealing with credible lender who can give you what you need.
On the contrary, many real estate transactions can not conform with the conventional requirements, and vice versa. Therefore, hard money loans could be the preferable, if not the only, option for a borrower.
If you can’t pay back the loan, the property you have put up as collateral is subject to a foreclosure. However, most hard money lenders have no desire to take your property. Their service to you is an income stream for them, and by taking your property, they will lose the possible income of certain percentage points of the loan amount per year. It is in their as well as your best interest to keep you in the property. They will typically follow certain steps to try and avoid foreclosure and try to work things out amicably. The Notice of Default to trigger the legal foreclosure process is usually a last resort.