A hard money loan is provided by private lenders rather than mainstream financial institutions. This type of loan is not based on the borrower’s credit. The lender can provide the loan even if the borrower has bad credit. The loan is based primarily on the amount of equity the investor has in the property proposed as a collateral.

As an example, those who invest in real estate by flipping houses frequently use this method for short-term financing. Or a landlord can use it to quickly buy a run down rental property, repair it, and once the deal is no longer considered risky, refinance the hard money mortgage with a traditional loan.

A hard money lender is a private individual or group of individuals who use their own or other investors’ funds to finance real estate projects. A hard money lender is not subject to the same regulations as is an institutional lender such as a bank. Consequently, a hard money lender has more flexibility when loaning money to investors.

If you are looking for a reputable hard money lender, an online search will provide you with more choices than you have time to check out. And even after spending time reviewing their reviews, how can you know if the lender is reliable and experienced?

That’s why our directory is so valuable to busy investors. We have done all the work for you, and we only list hard money lenders that have been thoroughly vetted by our staff.

A private money lender is typically not in the business of giving loans. As an example, if you want to fund a large residential or commercial construction project, you might see if any wealthy friends, family members, or their acquaintances would want to partner in the project. Private money usually comes from people with whom you have a relationship.

Whereas, a hard money lender is in a business that funds investment properties for the interest money they can collect.

Institutional lenders won’t approve loans for investors who have a bankruptcy, foreclosures, or IRS tax liens on their record. Hard money lenders don’t like a bad credit history either.

But hard money lenders are asset-based lenders and are more interested in an investor’s equity in the project. If the investor has sufficient capital in the project, a hard money lender is likely to be willing to make the loan and cover their increased risk with a higher interest rate and fees.

The hard money lender’s risk is reduced by the amount of the investor’s down payment. And in situations where the investor has a poor credit history, a higher down payment will be required.

In general, the investor will have to make some amount of down payment to lessen the lender’s risk—but not always. As an example, if the investor finds a bargain property to fix and flip, the lender might waive a down payment—especially if they have had a profitable previous experience with the investor.

Unlike conventional loan underwriting, hard money lenders develop their own underwriting guidelines. So hard money loan rates can vary significantly between lenders. For a loan with a term of three to thirty-six months, expect to pay anywhere from 7.5% to 15% interest. And the points to close on such a loan could be anywhere from 2% to 10% of the loan amount.

In general, hard money lenders have to charge higher interest and higher closing costs for shorter-term loans and riskier investments.

The investor's credit score is not as important as the amount of capital they put into the project. Typically, the investor must have 30% or 40% equity in the project. In many cases, an investor with a history of successful transactions can get a hard money loan even if they have a bad credit history.

But the lender will require from the investor a proof of enough cash reserves to make the monthly mortgage payments as well as property owning-related charges, and a reasonable plan that explains how they will be able to repay the loan.

After you’ve narrowed down your list of hard money lenders to two or three of the most reliable, present your project to each lender for their review. Document the present value of the property. Illustrate the future value of the property when it’s time for you to sell it. If you are flipping a house, for example, document your estimated expenses and the value of the home after rehab.

Document your past performance when flipping houses. Make sure the amount of money you are going to request is not more than 60% to 70% of the after repair value of the project.

Hard money lenders are subject to state laws. And those statutes vary by state. As a general rule, the lender is required to have a mortgage broker’s license when loaning money for owner-occupied investment properties, such as a duplex or a townhouse.

But in some states, such as Pennsylvania, a hard money lender does not need to be licensed if the investment property is non-residential and is meant for commercial purposes. It is recommended to do business only with licensed hard money lenders.

A traditional mortgage is provided by an institutional lender such as a bank or a savings and loan company. The primary qualifier for the loan is the borrower’s credit history. As long as the borrower makes a sufficient down payment, the lender will give the loan to credit-worthy individuals.
A hard money loan is made by a private individual or firm. The primary qualifier for the loan isn’t the borrower’s credit history, but the amount of the borrower’s equity in the project. Compared to a traditional mortgage, a hard money loan typically has a shorter term, higher interest costs, and higher closing costs.

Direct hard money lenders provide hard money loans for real estate investors directly, while hard money brokers are middlemen: they help borrowers choose the best loan from multiple loan products of different hard money lending companies.