Hard Money Loan Definition

What Is The Definition Of A "Hard Money Loan"?

A hard money loan is a specific type of asset-based loan financing through which a borrower receives funds secured by real property. Hard money loans are typically issued by private investors or companies.

Hard money loans are backed by the value of the property, not by the credit worthiness of the borrower. Since the property itself is used as the only protection against default by the borrower, hard money loans have lower loan-to-value (LTV) ratios than traditional loans.

Who Needs Hard Money Loans?

To put it simply: real estate investors are the only ones who can actually get hard money loans. By definition, a hard money loan is a real estate investment loan. At Glassridge, we almost only fund business entities (with rare exception), who are fixing & flipping or buying & holding real estate for profit.

From single family homes, to apartment buildings, to commercial, industrial, retail, and raw land, hard money loans are loans for those who are in it for the money. Let's examine this adequate quote from Joshua Dorkin over on Bigger Pockets:

Developers and house flippers, amongst others, will use [hard money] to fund deals because you can often borrow up to 100% of your purchase price! On the other hand, hard money lenders will frequently require you to back up your loan with real assets.

That's right: hard money loans are for real estate investors, and the chances are very good that a hard money loan will be collateralized with at least the property it's used to buy. Understanding this is an important part of the definition of real estate hard money loans: they don't always make sense for every investor, or on every deal... there is real risk involved.

In Joshua's BiggerPockets article, he goes on to include several potential ways you might use a hard money loan, all of which are reasonable and are the types of deals we aim to fund.

Potential Uses For Real Estate Hard Money Loans

  • Use hard money to buy a property and turn it quickly at a profit, especially if you can't get a standard mortgage, like on cash-only type properties.
  • Use hard money to buy a property, quickly add value (quick repairs, add tenant(s), raise rent(s), etc), then refinance with a cheaper bank loan.

To add a few more ideas, here are some other ways our clients use hard money loans to profit, which we're always looking to fund:

  • Use a hard money loan to cash-out equity on a portfolio of properties, often at fixed rates for 10 - 30 years.
  • Use a hard money loan to refinance other real estate you own under one simplified, convenient, and potentially cheaper portfolio or blanket loan.
  • Use your own capital to buy properties, and increase deal flow by using hard money for your rehab costs.
  • Experiment with different mixes of personal capital, bank loans, hard money, and equity partners to find the best results!

Ultimately, hard money loans are about making a profit for the investor. Since there's real financial risk involved, hard money loans don't make sense for everyone. If you're still wondering about the definition of a hard money loan, feel free to contact us here, or request more info below.