A hard money lender is any type of lender that provides short-term financing in the form of real estate-backed loans. The criteria used by the lender to determine whether a loan application is worthy of approval is somewhat different from loans offered by other types of lending institutions. Typically, the rate of interest charged by a hard money lender is slightly higher than other lending options, although the qualifications for loan approval may not be as extensive.
The main function of the hard money lender is to provide funding for a relatively short period of time. Loans of this type are sometimes called bridge loans, since the funds help the recipient to address immediate expenses in anticipation of the receipt of other funds within a reasonably short period of time. Hard money loans are relatively common in situations when applicants might find it difficult to obtain financing through other means, either due to a lack of assets or other issues that make it difficult to comply with standards set by other lenders.
One example of how a hard money lender provides services to clients is with individuals who purchase homes with the intention of repairing and upgrading those homes for a quick resale, earning some amount of profit in the process. Known as flipping, this type of investment activity can be lucrative for all parties concerned. Since the loan is usually for only a short period of time, the lender is repaid with interest in a matter of months, and the flipper makes enough to retire the loan and still have something left to show for his or her efforts. In the event that the house does not sell within an appreciable period of time and the flipper defaults on the loan, the hard money lender can usually seize control of the property and recoup most or even all of the outstanding balance.
While there are benefits to working with a hard money lender, there are also some potential drawbacks. One has to do with the rate of interest involved. Since lenders of this type usually require less information than other lenders to approve a loan, they assume a greater risk. This is partially covered by the higher interest rates that apply. In addition, hard money loans are collateralized loans, meaning that some sort of asset is pledged as collateral to cover the risk the lender is assuming. For individuals who are unable to supply collateral, choosing a loan of this type may not be a possibility.