What is a Hard Money Loan?

Hard-money loans are mortgage loans that are offered by private individuals rather than financial institutions, such as banks or credit unions. These individuals are known as "hard-money lenders." Borrowers who do not qualify for mortgages through financial institutions often look to hard-money loans as an option. These borrowers usually have bad credit, insufficient income, or other factors that are considered undesirable to financial institutions. Property conditions may play a role as well, in why financial institutions categorize these borrowers as high risk. A hard-money loan may also be an attractive choice for borrowers who are behind on their mortgage payments or in danger of foreclosure.

With a hard-money loan, a private individual, who is oftentimes also the property seller, acts as the lender and extends a loan to the high-risk borrower. The hard-money lender can be a person, a trust, a real estate investment group, or any other private entity. Because the private lender is taking on this risk, this lender charges higher interest rates than traditional mortgages obtained through financial institutions. The interest rates on hard-money loans can be twice as high or higher than loans available through traditional mortgage lenders. This is simply because these borrowers are considered much higher-risk candidates. But buying a hard-money home loan can be a great option for someone whose other financing options are non-existent.

Despite higher interest rates, there are some advantages to a hard-money loan. The borrower can negotiate the interest rate and other terms and conditions more easily with the private hard-money lender than with a financial institution. The borrower also saves money on title insurance premiums and attorney's fees charges often applied by financial institutions. Because borrowers don't have to wait for mortgage approvals from financial institutions, the closing period is also considerably shorter.