A hard money loan is a specific type of asset-based loan financing in which a borrower receives funds secured by the value of a parcel of real estate. These loans are typically issued at much higher interest rates than conventional commercial or residential property loans and are rarely issued by commercial banks or other deposit institutions.
Hard money is similar to a bridge loan with similar lending criteria and costs to the borrower. The primary difference is that a bridge loan often refers to a commercial property or investment property in transition that doesn't qualify for traditional financing. Hard money often refers to not only an asset-based loan with a high interest rate but a distressed financial situation, such as arrears on the existing mortgage, or where bankruptcy and foreclosure proceedings are occurring.
Private investors make many hard money mortgages, generally in their local areas. Usually, the borrower's credit score is not important, as the value of the collateral property secures the loan. Typically, the maximum loan to value ratio is 65-70%. If the property is worth $100,000, the lender will advance $65,000-70,000 against it. This low LTV provides added security for the lender in case the borrower does not pay and has to foreclose on the property.