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What is a hard money loan? A lot of seasoned mortgage professionals don't understand hard money lending, so it's not a big surprise that the average borrower doesn't.
A hard money loan is essentially a peer loan specifically for a real estate deal. Hard money is often used to borrow against a property before its existing loan has "seasoned" enough for to satisfy traditional lenders. Whereas peer loans might be for a business purpose like fulfilling a large manufacturing order, the term hard money loan is used almost exclusively for real estate transactions.
Hard money lenders are typically moderately wealthy investors with cash to lend at higher rates than the banks. They generally get involved in making hard money bridge loans in order to put their short term money to work in a way that outperforms the small returns usually handed out by the banks. A certificate of deposit might yield 4.5%. A short term hard money loan might yield upwards of 15%.
The hard money lender does take on more risk when he/she invests in a single borrower rather than pooling investment money with other investors in securitized mortgage investment vehicles. However, the rate of return is significantly higher as well. With the extra risk comes the extra reward.
Do not expect hard money lenders to be easy sources of real estate investment capital. They are generally a very business-savvy group of investors who will make sure you are who you say you are, and that your collateral property is what you say it is. Nevertheless, if you are in need of cash to close a real estate deal, and have exhausted traditional funding sources like your local bank, savings and loan, or credit union, you should consider a hard money loan. There are some sources of fast hard money loans, but be prepared to pay for the service. If the numbers pencil out to be profitable in spite of the higher debt servicing costs, chances are good it's a pretty good real estate deal.
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