A hard money loan is a very singular type of mortgage in which the loan is secured by a valuable asset such as real estate. This type of loan is most often used for the purchase of business real estate, but in some cases it can be used for private funding. The money itself usually comes from private sources, most often from the area in which the property in question is located.
A hard money loan can be collateralized against the property that the borrower is purchasing. If the structure of the loan is set up this way, the cash value of the loan is usually for about 70% of the quick sale value of the property itself. Because the loan is secured against real property, a borrower usually opts for a hard money loan as a last resort in times of financial distress. Sometimes it is the only form of financing possible, since credit score isn't a huge factor in qualifying for the loan.
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Private capital investors rarely take a look at a person's credit rating, more often paying attention to the money making capabilities of the venture they are financing. Due to the structure of the loan as it relates to the value of the collateral, it is rarely the whole source of financing for any given project. Interest rates for hard loans are usually a bit higher than a standard mortgage. While the interest rate may be somewhat regulated by government agencies so it doesn't get too high, hard money loans are not very tightly regulated. The rules of the industry are so different from the standard financing field that normal rules don't apply. In an almost comical turn of events, the nearly complete deregulation of the industry has allowed hard loans to be incredibly speedy and efficient, now that government has been taken out of the equation.
A hard money loan, therefore is often a good source of quick capital for ailing businessmen. Unfortunately, predatory lending tactics aren't uncommon, driving up the price of the loan. If you see yourself in the market for a this type of loan, make sure you use a professional real estate attorney, or you could become a victim yourself.
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