Hard Money Loan

A hard money loan is a short-term, asset-based loan from a private lender, secured by real estate. The lender decides mainly on the property: what it is worth now, what it could be worth, and how much of the borrower's own money is in the deal. Credit and income still matter, but less than in a bank loan. The name comes from the "hard" asset behind the loan. Many in the industry, including the American Association of Private Lenders (AAPL), now prefer the term private lending.

These loans usually last from a few months to a few years, and many are interest-only. Lenders size them with loan-to-value (LTV) or, for renovation deals, with a share of after-repair value (ARV). For example, a property worth $400,000 today, at a hypothetical 70 percent LTV, supports a loan of up to $280,000. Rates and fees are higher than bank loans because the lender takes more risk and closes faster, sometimes within days.

Most hard money loans go to investors for business purposes, such as a fix-and-flip loan or a bridge to long-term financing. In the US, credit made mainly for business purposes is generally outside federal consumer rules such as the Truth in Lending Act. State licensing and interest rate limits still vary, and a loan on a home the borrower will live in can bring consumer rules back into play.

Why it matters for lenders

Speed is the selling point, so private lenders must underwrite quickly without skipping steps. The main risks sit in the property and the plan: an inflated value, a thin budget, a weak exit strategy, or a borrower with no experience in this kind of project. Because the lender relies on the collateral, the title, insurance, valuation and lien position all need to be right before funding. If the loan defaults, recovery depends on how quickly the lender can foreclose and sell, and that differs by state.

How it works in practice

A private lender gets a request on Monday to fund a purchase by Friday. The loan officer collects the purchase contract, the borrower's track record, company documents, and proof of funds for the down payment. The underwriter orders a valuation, reviews comparable sales, and checks the loan against the lender's LTV limit. Title and insurance are ordered right away. A principal approves the file on Wednesday, and it closes on Friday.

That pace exposes weak processes. When intake lives in email and the terms are retyped into a servicing spreadsheet, a missing insurance policy or a wrong maturity date can slip through. Keeping the property, borrower and loan on one record helps a fast lender stay careful.