What is a Hard Money Loan?

A hard money loan is a short-term asset-based, or equity-based, loan secured by real estate and funded by a private investor, or multiple private investors, as opposed to being funded by conventional lenders such as banks or credit unions. Hard money loans are generally used by real estate investors as a short-term bridge loan with a duration of three months to three years, after which the investor will either sell or refinance the property.

The monthly payments usually consist of interest-only with a balloon payment due at the end of the term. Some hard money loans, like construction loans, have a built-in interest reserve to service the debt during the loan period.

Asset-based hard money loans place greater emphasis on the property value rather than the buyer’s credit, though credit is a consideration. Depending on the lender, a hard money loan may not require an appraisal. Some lenders will do their own due diligence followed by a site inspection of the property rather than ordering an appraisal.

Real estate investors obtain hard money loans through mortgage brokers or directly from a hard money lender. There are several types of hard money lenders, including private individuals, multiple lenders funding one Note, a family office, conduit mortgage lenders, or a mortgage fund. Most hard money lenders have a real estate or finance background and are familiar to the local markets where they are lending money.