Investing Glossary

Hard Money Loan

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A hard money loan is a type of loan that is secured by real property. These loans are primarily used in real estate transactions, with the lender generally being individuals or companies and not banks. A hard money loan, usually taken out for a short time, is a way to raise money quickly but at a higher cost and lower LTV (Loan-To-Value) ratio. Typically because hard money loans rely on collateral rather than the financial position of the applicant, the funding time frame is shorter. Though because they are not regulated the terms of hard money loans can often be negotiated between the lender and the borrower though typically involve very high interest rates. Default by the borrower can still result in a profitable transaction for the lender through collecting the collateral. Hard money loans have terms based mainly on the value of the property being used as collateral, not on the creditworthiness of the borrower. Since traditional lenders, such as banks, do not make hard money loans, hard money lenders are often private individuals or companies that see value in this type of potentially venture. Hard money loans may be sought by property flippers who plan to renovate and resell the real estate that is used as collateral for the financing often within a time frame of one year. The higher cost of a hard money loan is offset by the fact that the borrower intends to pay off the loan relatively quickly in full. Hard money loans may be used in turnaround situations, short-term financing, and by borrowers with poor credit but substantial equity in their property. One advantage to a hard money loan is the approval process, which tends to be much quicker than applying for a mortgage or other traditional loan through a bank. The private investors who back the hard money loan can make decisions faster because the lender is focused on collateral rather than an applicant’s financial position. Hard loan investors aren’t as concerned with receiving repayment because there may be an even greater value and opportunity for them to resell the property themselves if the borrower defaults.

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