Also called asset-based financing, hard money loans are a type of secured financing that provides the borrower with loan funds secured by an asset with established market value. Hard money loans are sometimes also called “last resort” or short-term bridge loans and are most often associated with real estate financing.
As a secured loan, hard money or asset-based financing require collateral before the loan funds are approved and released. Depending on the type of hard money loan, the collateral may be title to real property, a security deposit, an account with a trustee or a vehicle’s pink slip.
The central features of hard money secured loans are that they are based on the value of the collateral property and typically ignore the borrower’s credit, income and assets.
Hard money loans can provide an alternative option for borrowers unable to qualify for regular financing or traditional loans. The following are situations that may be served by a hard money loan:
Hard money loans are sometimes considered a form of “no documentation” (No Doc) financing, because of the low borrower documentation requirement.
Unfortunately, these benefits come with a cost for the borrower. Hard money loans tend to be more expensive and require substantial collateral. In fact, most hard money lenders typically will only lend up to 65% of the collateral’s appraised market value.
On the face of it, hard money loans may seem like very risky investments for lenders. But the lender’s risk exposure is mitigated by the terms of the hard money loans.
Most hard money loans involve commercial real estate investments and developments, which have traditionally carried a great deal of risk even for traditional lenders. To manage its high-risk exposure, hard money lenders only lend a fraction of the property’s current market value. In addition, the loan terms are relatively short, with typical loan maturities of three years or less.
If the borrower defaults, hard money lenders will be able to recoup their investment by seizing the collateral property and using it to pay off the loan balance and all applicable fees and finance charges. Because the collateral asset is crucial for the hard money lender’s risk management, lenders will usually conduct a detailed and careful appraisal of the subject property that will be used as collateral for the loan.
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