A hard money loan is a loan that is backed by the value of the property it is being used for, not by the credit-worthiness of the owner. They are often referred to as a “last resort” loan, because they have lower LTV ratios than traditional loans because the value of the house is the only form of protection if the borrower defaults.
Hard money loans carry very high interest rates, since traditional banks won’t arrange them and hard loan lenders see this as the only way to gain in this risky venture.The loans are usually used in quick turnaround situations, short-term financing, or borrowers with poor credit but substantial equity. They can also be used as a way to try and stave off foreclosure. In real estate, hard money loans are frequently sought after by property flippers who plan to renovate and sell the real estate that is being used as collateral. This option is appealing to them because they plan to sell the property at a profit within a short amount of time, and could be able to quickly pay off the loan. For them, the higher costs of a hard money loan are offset by the advantages they offer to the borrower. These include faster access to capital, less stringent approval process, and the risk on behalf of the lender that is taking up the financing.